Edited version of private advice

Authorisation Number: 1052252370722

Date of advice: 17 May 2024

Ruling

Subject: Commissioner discretion - compulsory acquisition of land

Question 1

Will the Commissioner exercise discretion to allow you an extension of time until DDMM202Y to acquire replacement asset/s pursuant to paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Commissioner exercise discretion to allow you an extension of time until DDMM202Y to acquire replacement asset/s pursuant to paragraph 40-365(3)(b) of the ITAA 1997?

Answer

Yes.

Question 3

Will the Commissioner exercise discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow you an extension of time until DDMM202Y to choose to apply the CGT roll-over concessions provided by section 124-70 of the ITAA 1997?

Answer

Yes.

Question 4

Will the Commissioner exercise discretion under paragraph 40-130(1)(b) of the ITAA 1997 to allow you an extension of time until DDMM202Y to choose to apply the balancing adjustment roll-over concessions provided by subsection 40-365(1) of the ITAA 1997?

Answer

Yes.

Question 5

Is the compulsory acquisition of your land a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commenced on:

DDMM20YY

Relevant facts and circumstances

You are registered for good and services tax (GST).

You own land that you have used to undertake a farming business (your Business).

On DDMM20YY, a state government body compulsorily acquired two portions (but not the whole) of your land (the Taken Land).

The Taken Land was acquired pursuant to relevant legislation.

Title of the Taken Land was transferred to the state government body on DDMM20YY.

The compulsory acquisition of the Taken Land also resulted in title to various assets and depreciating assets located on the Taken Land being transferred to the state government body.

You were advised of the compulsory acquisition by way of letter soon after and were invited to lodge a claim for compensation (Claim) in accordance with the relevant legislation. You did not approach the state government body to discuss the potential acquisition of the Taken Land.

Later in 20YY, you signed a Deed with the state government body that enforced the relevant order and an advance payment of $X.(First Advance Payment). The state government body and you agreed that the First Advance Payment would be set off against any compensation that was payable to you in consequence of your Claim.

The First Advance Payment was made to assist you with expenses relevant to loss or damage you incurred because of the compulsory acquisition.

You then lodged the Claim for total compensation, being an amount higher than the amount you had received at that time.

You received more Advance Payments, including interest and solatium, which settled all amounts owed to you in respect of land and improvements and property, and plant and equipment that were compulsorily acquired.

Remaining aspects of the Claim have not yet been settled. You do not yet know the total quantum of compensation to be received, and it is the subject of ongoing legal dispute.

You have continued to conduct your business on those parts of the land which were not taken (Remaining Land) and at various other properties you use.

Your business has been materially impacted by the compulsory acquisition and you have needed to alter your business operations.

You intend to utilise the proceeds that you have received and will continue to receive to purchase, among other things, new farmland. You will use that farmland to conduct your Business.

You have been unable to purchase replacement assets, such as farmland, to the full amount of the value compulsorily lost to date because:

•         you remain in ongoing negotiations with the state government body in relation to the quantum of compensation,

•         you have received only a portion of your total Claim to date,

•         your claim with respect to land and improvements and property, plant and equipment was only settled on or around DDMM20YY and paid out in the following month, and

•         there is considerable uncertainty about the quantum of the funds you will ultimately receive.

The uncertainty surrounding the quantum of funds you will receive has also made it commercially unviable for you to commit to purchasing significant replacement depreciating assets.

You have incurred some expenditure on replacement assets within the period of one year after the compulsory acquisition date.

Your tax agent lodged your income tax return for the year ended 30 June 20YY (20YY Tax Return) on DDMM20YY. It does not disclose the occurrence of any CGT event and does not include any amount in your assessable income because of the compulsory acquisition.

At the time of lodging your 20YY Tax Return, neither you nor your tax agent were aware that:

•         CGT event A1 had arisen for you on DDMM20YY, and

•         there were CGT and balancing adjustment roll-over concessions available to you.

You engaged the services of taxation lawyers while preparing your income tax return for the year ended 30 June 20YY (20YY Tax Return).

You noted that no proceeds in relation to the compulsory acquisition were received until a date within the financial year ended 30 June 20YY. You only became aware that a CGT event had happened on DDMM20YY after the engagement the taxation lawyers.

You have not yet lodged your 20YY Tax Return.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 40-130(1)(b)

Income Tax Assessment Act 1997 paragraph 40-365(3)(b)

Income Tax Assessment Act 1997 paragraph 103-25(1)(b)

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 paragraph 124-75(3)(b)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The Commissioner will exercise his discretion to allow you an extension of time until DDMM20YY to acquire replacement asset/s pursuant to paragraph 124-75(3)(b).

Detailed reasoning

According to subsection 124-70(1), you can choose a roll-over if the CGT asset that you own is compulsorily acquired by an Australian government agency. Subsection 124-70(2) provides that to be eligible for a roll-over, you must receive money or another CGT asset or both as compensation for the event happening.

Subsection 995-1(1) defines an Australian government agency as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. In your case the property was compulsorily acquired by the state government body, which is an Australian government agency.

Under subsection 124-75(2) where you receive money for the CGT event happening, you are required to incur expenditure in acquiring another CGT asset. According to subsection 124-75(3) you are required to incur at least some of the expenditure either:

•         no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens, or

•         no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens.

The time of the CGT event A1 is determined by subsection 104-10(6):

If the asset was acquired from you by an entity under a power of compulsory acquisition conferred by an Australian law or a foreign law, the time of the event is the earliest of:

(a)          when you received compensation from the entity; or

(b)          when the entity became the asset's owner; or

(c)          when the entity entered it under that power; or

(d)          when the entity took possession under that power.

The title of the Taken Land was transferred to the state government body on DDMM20YY, and this is the time of the CGT event A1. Consequently, you were required to incur at least some expenditure in acquiring a replacement asset by 30 June 20YY.

Taxation Determination TD 2000/40 Income tax - capital gains - what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997? (TD 2000/40) explains that the expression special circumstances in the context of subsection 124-75(3) by its nature is incapable of a precise or exhaustive definition.

Some examples of special circumstances are provided in TD 2000/40, including examples 3:

Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time.

Although you have received some proceeds, you are still in negotiations with the state government body about the amount of compensation you will receive because of the compulsory acquisition of the Taken Land.

You are unable to accurately anticipate the final compensation, and this impedes your ability to acquire replacement assets such as new farmland that you plan to use to conduct your Business.

Your situation falls within scope of what would be considered special circumstances therefore the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow an extension of time until DDMM20XY for you to incur some of the expenditure to acquire a replacement CGT asset.

Question 2

Summary

The Commissioner will exercise his discretion to allow you an extension of time until DDMM20YY to acquire replacement asset/s pursuant to paragraph 40-365(3)(b).

Detailed reasoning

Section 40-365 allows you to choose whether to include a balancing adjustment amount in your assessable income where you cease to hold a depreciating asset because the original asset is compulsorily acquired by an Australian government agency.

You can choose to utilise some or the entire amount that would otherwise be a balancing adjustment as a reduction in the cost and/or opening adjustable value of one or more replacement assets. The cost of the replacement asset is reduced by the otherwise assessable amount.

Under subsection 40-365(3) the choice can only be made where you incur the expenditure on the replacement asset or you start to hold it no later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment occurred.

In looking at the circumstances in which the Commissioner allows a further period, the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (the EM) states at paragraph 3.82:

Examples of when the Commissioner may allow a further period under paragraph 40-365(3)(b) include:

•        in the event of a destruction of large infrastructure assets it will be likely to take... more than 12 months to rebuild those assets, and there are no suitable corresponding assets acquired within 12 months before or after the destruction; or

•        in the event of the replacement asset being acquired from overseas it will be likely to take more than 12 months to deliver such assets, and there are no suitable corresponding assets acquired within 12 months before or after the destruction.

The following explanation is provided in the Guide to depreciating assets 2023 (NAT 1996-6.2023):

You must incur the expenditure on the replacement asset, or start to hold it, no earlier than one year before the involuntary disposal and no later than one year after the end of the income year in which that disposal occurred.

The Commissioner can agree to extend the time limit, for example, if it is unlikely that insurance claims for the disposal of the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claims settled.

As noted in ATO ID2002/1000 (Withdrawn) Income Tax Involuntary disposal - extension of time in acquiring a replacement depreciating asset, which was withdrawn as the issue is dealt with in the Guide to depreciating assets, the examples listed in TD 2000/40 may be considered in relation to paragraph 40-365(3)(b).

When the state government body compulsorily acquired the Taken Land it resulted in title to various depreciating assets located on the Taken Land being transferred to it.

Although you have received some proceeds, you are still in negotiations with the state government body about the final amount of compensation you will receive because of the compulsory acquisition of the Taken Land.

You are unable to accurately anticipate the amount of the final compensation. This impedes your ability to purchase new farmland on which to install any replacement assets.

On consideration of the facts and circumstances the Commissioner will exercise his discretion under paragraph 40-365(3)(b) to allow you a further period until DDMM20YY to incur the expenditure on the replacement assets.

Question 3

Summary

The Commissioner will exercise his discretion under paragraph 103-25(1)(b) to allow you an extension of time until DDMM20XY to choose to apply the CGT roll-over concessions provided by section 124-70.

Detailed reasoning

Subsections 103-25(1) and (2) provide that:

(1)          A choice you can make under this Part or Part 3-3 must be made:

(a)          by the day you lodge your *income tax return for the income year in which the relevant *CGT event happened; or

(b)          within a further time allowed by the Commissioner.

(2)          The way you (and any other entity making the choice) prepare your *income tax returns is sufficient evidence of the making of the choice.

ATO Interpretative Decision ATO ID 2003/103 Capital gains tax: Choice and the small business roll-over, explains that:

A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

Prior to lodging your income tax return for the year ended 30 June 20YY, you and your tax agent were unaware that a CGT event A1 occurred for the year ended 30 June 20YY, and did not make a choice to apply the CGT roll-over concessions provided by section 124-70.

Taking into consideration your relevant circumstances, the Commissioner will allow an extension of time under paragraph 103-25(1)(b) to DDMM20XY to choose to apply the CGT roll-over concessions provided by section 124-70.

Question 4

Summary

The Commissioner will exercise his discretion under paragraph 40-130(1)(b) to allow you an extension of time until DDMM20XY to choose to apply the balancing adjustment roll-over concessions provided by subsection 40-365(1).

Detailed reasoning

Subsection 40-130(1) provides that:

A choice you can make under this Division about a depreciating asset must be made:

(a) by the day you lodge your income tax return for the income year to which the choice relates; or

(b) within a further time allowed by the Commissioner.

The Division referred to here is Division 40, which includes Subdivision 40-D balancing adjustments.

The Explanatory Memorandum to New Business Tax System (Capital Allowances) Bill 2001 includes the following explanation:

1.154 The general rules relating to when a taxpayer must exercise a choice provided under Division 40, and the effect of this decision, are contained in section 40-130...

1.155 The decisions must generally be made by the time the taxpayer actually lodges the income tax return for the first income year that the decline in value is being calculated for [Schedule 1, item 1, paragraph 40-130(1)(a)]...

1.156 However, in certain cases a taxpayer may be allowed additional time for making these decisions [Schedule 1, item 1, paragraph 40-130(1)(b)]. An example of where the Commissioner might grant such an extension is where a taxpayer has sought a determination of the effective life of an asset and has asked for an extension of time to make a choice.

Subsection 40-130(1) is similar in wording to subsection 103-25(1), and the principles applied to considering the Commissioner's discretion in paragraph 103-25(1)(b) may apply to 40-130(1)(b).

Taking into consideration your relevant circumstances, the Commissioner will allow an extension of time under paragraph 40-130(1)(b) to DDMM20YY to choose to apply the balancing adjustment roll-over concessions provided by subsection 40-365(1).

Question 5

Summary

The compulsory acquisition of the land is not a taxable supply under section 9-5 of the GST Act. GST will not be payable as the land was compulsorily acquired by government entity and the interest in the land was vested in the government entity without you taking any action to transfer your interest in the land. The particular statute enforces the transfer.

Detailed reasoning

Taxable supplies

For a supply to be a taxable supply, all the requirements in section 9-5 of the GST Act must be satisfied.

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a)          you make the supply for consideration; and

(b)          the supply is made in the course of furtherance of an enterprise that you carry on; and

(c)          the supply is connected with the indirect zone; and

(d)          you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Relevantly, a supply is broadly defined in section 9-10 and provides that:

(1)          A supply is any form of supply whatsoever.

(2)          Without limiting subsection (1), supply includes:

...

(d)          a grant, assignment or surrender of real property;

(e)          a creation, grant, transfer, assignment or surrender of any right;...

Goods and Services Tax Ruling GSTR 2006/9 - Goods and services tax: supplies (GSTR 2006/9), examines the meaning and characteristics of 'supply'. Specifically, paragraphs 80 to 91 of the GSTR 2006/9 discuss whether the extinguishment of real property rights due to a compulsory acquisition constitutes a supply with the meaning of the GST Act. Paragraph 80 provides that:

Extinguishment of real property rights

80. Various government authorities are empowered by legislation to acquire an interest in real property. Two common mechanisms employed by legislations are:

•        the vesting of the interest in the relevant government authority and extinguishing any previous interests in the real property; and

•        the particular statute may allow the government authority to acquire the real property by agreement.

In the current case, the state government body exercised its statutory right to compulsorily acquired the real property. As per the state government body's notice, it was unable to purchase the property by negotiation and it became necessary for it to exercise its statutory power to compulsory acquire two portions of the property on DDMM20YY and the ownership of portion of the land was transferred to the state government body from that date. Additionally, the state government entity invited you to complete and lodge a claim for compensation which you completed and submitted.

In GSTR 2006/9, the Commissioner agrees that the making of a supply requires some positive action on the part of the supplier to make a supply. For example, in Re Hornsby Shire Council v Commissioner of Taxation [2008] AATA 1060, the owner actively promoted the acquiring entity (Hornsby Shire Council) to utilise its statutory power to acquire and vest the relevant land in itself. This positive action constituted a 'supply' that resulted in a taxable supply.

In the current case, you did not provide anything to the state government body and did not take any action to cause the legal interest to be transferred or surrendered to it. It was the state government body that initiated the process and compulsorily acquired the real property pursuant to its statutory rights, and consequently vest its interest in the Taken Land.

Paragraph 82 of GSTR 2006/9 provides that:

In cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the compulsory acquisition process pursuant to its statutory right, then the owner does not make a supply. This is because the owner does not provide anything to the authority. It takes no action to cause its legal interest to be transferred or surrendered to the authority. It has no obligation to do anything, to refrain from doing something or to tolerate an act or situation.

It follows that you did not make a supply, and as such there is no taxable supply under section 9-5 of the GST Act.

GST on compensation payments

You received proceeds in respect of the:

•         Taken Land

•         Plant and equipment which was on the Taken Land

•         Other loss or damage you incurred as a consequence of the taking of the Taken Land, and

•         Interest and solatium.

Section 9-15 of the GST Act provides that a payment will be consideration for a supply if the payment is in 'connection with' a supply and 'in response to' or 'for the inducement' of a supply. To make a supply for consideration, there must be a sufficient nexus between a particular supply and a particular payment, which is provided for that supply.

Paragraph 84 of GSTR 2006/9 provides that:

84. Mere acceptance by an owner of an amount of compensation payable on the compulsory acquisition does not provide a sufficient nexus between the land which passes and the means by which it passes. The fact that the owner does not dispute the acquisition is not an activity that effects the supply of the land. Even if the owner agrees to the terms of the acquisition and the amount of compensation, the land is acquired by operation of the statute, upon publication of the acquisition notice, not by an action taken by the landowner.

The compensation relates to the loss you suffered on the extinguishment of your interest in the Taken Land. We do not consider that the compensation under the facts described above has a sufficient nexus with the supply of the land compulsorily acquired and is therefore not consideration.

Furthermore, Goods and Services Tax Ruling GSTR 2001/4 - Goods and Services Tax: GST consequences of court orders and out-of-court settlements(GSTR 2001/4) discusses payments made under an out-of-court settlement to resolve a damage claim. Specifically, paragraph 111 provides that:

111. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

As discussed earlier, no supply occurs when the government authority exercises its statutory power to gain interest in a real property through the compulsory acquisition process. Consequently, any compensation received is not consideration for an earlier supply. Similarly, there is no new supply created by the terms of the settlement agreement and therefore, the compensation amount is not consideration for a new supply.

Advance payments you received, or will receive, are compensation claims and are not consideration for any supply you made. Accordingly, any payment related to loss or damage incurred from the compulsory acquisition of the Taken Land does not satisfy the conditions for consideration for a supply under paragraph 9-5(a) of the GST Act and therefore not constituting a taxable supply.