Edited version of private advice

Authorisation Number: 1052256994206

Date of advice: 29 May 2024

Ruling

Subject: CGT - extension of time to acquire replacement asset

Question 1

If the Replacement Asset (RA) is acquired by C Unit Trust (CUT) rather than B Pty Ltd, provided other requirements under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) are satisfied, will the A Pty Ltd tax consolidated group still be entitled for CGT rollover relief?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion under Subdivision 124-75(3)(b) of the ITAA 1997, to allow A Pty Ltd an extension of time up to XX XX XXXX to incur expenditure to acquire another capital gains tax (CGT) asset under Subdivision 124-75(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

1.            On XX/XX/XXXX the A Pty Ltd consolidated group (ACG) was formed for income tax purposes with A Pty Ltd (A) being the head company.

2.            B Pty Ltd (B) and C Unit Trust (CUT) are subsidiaries of the ACG.

3.            On XX/XX/XXXX, B acquired a property (the Property).

4.            The Property was at all material times during B's ownership, fully leased and rental income was derived by the ACG.

5.            The Property was held by B on capital account and it did not represent trading stock.

6.            On XX/XX/XXXX, entity E sent advised of its intention to acquire the Property for the purpose of the construction of a X forming part of a government project (Project).

7.            On XX/XX/XXXX E compulsorily acquired the Property in accordance with the Y Act XXXX for the purpose of the construction of the Project (the Acquisition).

8.            E made payments of approximately $X to B on XX/XX/XXXX as compensation for the compulsory acquisition of the Property.

9.            In XX/XXXX, the ACG commenced activities in relation to searching for replacement assets (each a RA) when it became apparent that the Acquisition was inevitable.

10.          On XX/XX/XXXX, the ACG inspected a property situated at XX (Z Property).

11.          On XX/XX/XXXX, CUT on behalf of the ACG acquired the Z Property for $X as the first RA. The purchase contract was settled on XX XX XXXX.

12.          After the acquisition of the Z Property, the ACG has continued to research other potential RAs in order to fully utilise the rollover relief. The balance of the expenditure to be incurred to acquire other RAs is approximately $X.

13.          As the Property was compulsorily acquired during the year ended XX/XX/XXXX, the expenditure for a RA must be incurred prior to XX/XX/XXXX, i.e. the income year following the year in which the Property was compulsorily acquired.

14.          The ACG is anticipating delays to fully incurring the remaining $X in acquiring other RAs by XX/XX/XXXX due to a number of challenges including limited supply of available replacement asset, strong market competition, current economic uncertainties and human resources constraints.

15.          Despite these challenges, the ACG has implemented the various measures to increase the possibility to find suitable RAs:

a)    Research and analysis of information gathered through professional associations and attending conferences and meetings.

b)    expanding locations of potential RAs beyond capital cities.

c)    Regular contact with a key buyer agent and other property agents who are specialised in locations of interest.

d)    setting up an internal IT platform for sharing property information and analysing properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(6)

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 subsection 124-70(1)

Income Tax Assessment Act 1997 paragraph 124-70(1)(a)

Income Tax Assessment Act 1997 paragraph 124-70(1)(aa)

Income Tax Assessment Act 1997 subsection 124-70(1A)

Income Tax Assessment Act 1997 subsection 124-70(2)

Income Tax Assessment Act 1997 paragraph 124-70(2)(a)

Income Tax Assessment Act 1997 section 124-75

Income Tax Assessment Act 1997 subsection 124-75(2)

Income Tax Assessment Act 1997 subsection 124-75(3)

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

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

Income Tax Assessment Act 1997 subsection 124-75(4)

Income Tax Assessment Act 1997 subsection 124-75(5)

Income Tax Assessment Act 1997 subsection 124-75(6)

Income Tax Assessment Act 1997 section 700-1

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

If the Replacement Asset (RA) is acquired by CUT rather than B Pty Ltd, provided other requirements under Subdivision 124-B are satisfied, will the A tax consolidated group still be entitled for CGT rollover relief?

Summary

The A tax consolidated group would be entitled to CGT rollover relief if the Replacement Asset (RA) is acquired by the CUT, provided all requirements under Subdivision 124-B are satisfied.

Detailed reasoning

CGT Rollover Relief under Subdivision 124-B

16.          Section 104-10 states that CGT event A1 occurs if you dispose of an asset, whether because of some act or event or by operation of law. The time that CGT event A1 happens is when the taxpayer enters into the contract for the disposal or when ownership of the CGT asset changes if there is no contract.

17.          However, 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, subsection 104-10(6) states that 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.

Note: You may be able to choose a roll-over if an asset is compulsorily acquired: see Subdivision 124-B

18.          On XX/XX/XXXX, B received payment of $X from E as compensation for the compulsory acquisition of the Property. Accordingly, the time of CGT event A1 for the disposal of the Property is when PB received the compensation payment.

Consolidation and single entity rule (SER)

19.          The Guide to the consolidation regime at section 700-1 expresses the intention of the law to treat a consolidated group as a single entity. It provides that following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities.

20.          Section 701-1 sets out the 'single entity rule' to treat the subsidiary members of the group as parts of the head company rather than as separate entities during the period of consolidation for the purposes of determining the income tax liability of the head company (the head company core purposes) and the subsidiary members.

21.          Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 (TR 2004/11) sets out the Commissioner's view on the application of the single entity rule (SER). Paragraph 31 of TR 2004/11 states:

A consequence flowing from the SER is that while an entity is a subsidiary member of a consolidated group, actions and transactions of that member are treated as having been undertaken by the head company. In addition, the assets owned by subsidiary members of the group are taken to be owned by the head company (other than assets where the rights and obligations are between members of the group) [see the EM - paragraphs 2.12, 2.20 and 2.26].

22.          In the present case, when the compulsory acquisition happened, the CGT Event A1 was triggered for A as the head company of the ACG. Given both B and the CUT are members of the ACG, any RA acquired by CUT will be considered to have been acquired by A under the SER for income tax purposes, in accordance with section 701-1 and TR 2004/11.

23.          Accordingly, rollover relief for the compulsory acquisition of the Property would be available to A if the conditions outlined in Subdivision 124-B are met.

Question 2

Will the Commissioner allow further timer under paragraph 124-75(3)(b) to allow A an extension of time up to XX/XX/XXXX to incur expenditure to acquire another CGT asset under subsection 124-75(2)?

Summary

The Commissioner will allow further time under paragraph 124-75(3)(b) to allow A an extension up to XX/XX/XXXX to incur expenditure to acquire another capital gains tax asset under subsection 124-75(2).

Detailed reasoning

24.          Division 124 contains the replacement-asset roll-overs that allow you to defer the making of a capital gain or loss from one CGT event until a later CGT event you if you meet the conditions for roll-over.

25.          Subdivision 124-B contains a roll-over for when assets are compulsory acquired, lost or destroyed.

26.          Under subsection 124-70(1), you may be able to choose a replacement asset rollover if a CGT asset of yours is compulsorily acquired:

(a)          by an Australian government agency.[1]

(b)          by an entity (other than an Australian government agency or a foreign government agency) under a power of compulsory acquisition conferred by a law covered under:[2]

                                  (i)          an Australian law (other than Chapter 6A of the Corporations Act 2001); or

                                 (ii)          a foreign law (other than a foreign law corresponding to Chapter 6A of the Corporations Act 2001).[3]

27.          Paragraph 124-70(2)(a) provides that the roll-over is only available if you receive either money or another CGT asset, or both, as compensation for the original asset being compulsorily acquired.

28.          If you received money as compensation for the involuntary disposal of a CGT asset, section 124-75 provides further requirements which must be satisfied to be eligible for a rollover.

29.          Subsection 124-75(2) requires that the owner of the asset must incur expenditure in acquiring another CGT asset.

30.          Subsection 124-75(3) requires the entity to incur some of that expenditure either:

(a)          no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens;[4] or

(b)          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.[5]

31.          Subsection 124-75(4) requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. Additionally, just after the acquisition, the replacement asset cannot become:

•                an item of trading stock or be a depreciating asset[6], or

•                a 'registered emission unit'[7]

32.          For the purposes of subdivision 124-B, 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.

33.          E is entity constituted by an Act. On the basis that E is a state-owned agency or authority of a state government, we consider that E is an Australian government agency for the purpose of subsection 124-70(1).

34.          Consequently, the Property was compulsorily acquired by an Australian government agency.

Did GLH incur expenditure to acquire another CGT asset?

35.          On XX/XX/XXXX, B received from E $X as compensation for the compulsory acquisition of the Property. Consequently, to be able to choose to apply the roll-over, the ACG must:

(a)          have incurred expenditure to acquire another replacement asset;

(b)          as the CGT event occurred in the XXXX income year, acquire a RA by XX/XX/XXXX;

(c)           as immediately prior to its compulsory acquisition, the Property was used ACG's business, any RA must also be used in ACG's business.

36.          On XX/XX/XXXX, CUT on behalf of the ACG acquired one RA for $X. This acquisition was made within the period under Paragraph 124-75(3)(b). Following this acquisition, the balance of the expenditure to be incurred to acquire other RAs is approximately $X. However, ACG advised that due to a number of factors, it is anticipated that there will be delays in incurring the remaining expenditure amount to acquire another RA by XX/XX/XXXX.

37.          In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3)? (TD 2000/40) provides guidance on interpreting subsection 124-75(3), in particular, what are 'special circumstances'.

38.          TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitutes 'special circumstances' depends on the facts of each particular case.

39.          In determining whether the discretion will be exercised, the Commissioner also considers the following factors:

•                there should be evidence of an acceptable explanation for the period of the extension requested and that it would be fair and equitable in the circumstances to provide such an extension

•                account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;

•                account must be had of any unsettling of people, other than the Commissioner, or of established practices;

•                there must be consideration of fairness to people in like position and the wider public interest;

•                whether there is any mischief involved; and a consideration of the consequences; and

•                a consideration of the consequences.

40.          A has stated that it has actively been searching for a RA and has pursued various investment opportunities. However, the strong competition in the X property market, the substantial amount to be invested, A's own internal governance process to ensure that the property the ACG decides to buy is a good opportunity with manageable risk has meant further delays in purchasing a replacement asset.

41.          Another reason for delay in obtaining a replacement asset is that A has stated that it has a shortage of human resources to look for a suitable RA, due to X% of their staff being involved in a substantial development that was underway when the compulsory acquisition of the Property became a possibility.

42.          Despite the above factors, A has stated that they are conducting more research through its membership of a professional association, expanded locations for possible RAs to other capital cities and is in regular contact with property agents to acquire another RA.

43.          Based on these facts, it is considered that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset.

44.          Also, by granting this extension of time to acquire a replacement asset:

•                there does not appear to be any prejudice to the Commissioner or any other parties;

•                there is no unsettling of people or of established practices;

•                there does not appear to be any mischief involved in this case; and

•                the Commissioner considers it to be fair to people in like positions and in the wider public interest.

45.          Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) to allow A an extension to obtain a RA for property that was compulsorily acquired by E until XX/XX/XXXX.

[1] Paragraph 124-70(1)(a).

[2] Paragraph 124-70(1)(aa).

[3] Subsection 124-70(1A).

[4] Paragraph 124-75(3)(a).

[5] Paragraph 124-75(3)(b).

[6] Subsection 124-75(5).

[7] Subsection 124-75(6).