Edited version of private advice

Authorisation Number: 1052271756415

Date of advice: 27 August 2024

Ruling

Subject: Commissioner discretion - extension of time

Question

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow further time until 30 June 2028 to incur expenditure to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trustee for the Trust (the Taxpayer) was conducting a business and had the land for its business premises compulsorily acquired on DDMMYYYY by the Government.

The Taxpayer received $X in proceeds.

A capital gain arose from the compulsory acquisition of the land.

The Taxpayer is seeking to roll over the capital gain under Subdivision 124-B.

The Taxpayer has received 2 Administrative Discretions in which the Commissioner extended the replacement asset period in accordance with paragraph 124-75(3).

The Taxpayer incurred expenditure in acquiring land (Acquired Property) which settled on DDMMYYYY as a replacement asset.

Significant further development of the land is required before the land can be used in the business.

There is an on-going claim with the Government over the quantum of the compensation.

The building of the business premises is contingent on the receipt of the compensation claim to progress its construction.

Once the compensation application is settled and the compensation is received, the Taxpayer will require further time to complete the building works.

It is expected that the building and associated costs will exceed the disposal proceeds received.

If the Taxpayer does not receive sufficient compensation to undertake the capital works, it will not use the Acquired Property in its business and the Acquired Property would not qualify as a replacement asset.

The Taxpayer would seek to acquire a different replacement asset if the Acquired Property cannot be used in the business.

Whether a different replacement asset needs to be acquired depends on the ongoing compensation negotiations (the timing of which is outside the Taxpayer's control).

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(2)

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

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 section 124-70

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 subsection 124-75(4)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Issue

Question 1

Summary

As the Taxpayer is still in dispute with the government authority over the quantum of compensation for the compulsory acquisition of the Property and the Taxpayer has been actively seeking suitable replacement assets, the Commissioner will exercise the discretion under paragraph 124-75(3)(b) to extend the time for the Taxpayer to incur expenditure on a replacement CGT asset.

Detailed reasoning

CGT Event A1

Under subsection 104-10(2) you dispose of an asset if a change of ownership occurs whether because of some act or event or by operation of law.

Capital Gains Tax (CGT) event A1 is triggered as a result of the acquisition of a CGT asset by another entity under a power of compulsory acquisition.

The time that CGT event A1 happens is determined by subsection 104-10(6) which states:

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.

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

CGT Rollover Relief under Subdivision 124-B

Subdivision 124-B contains a roll-over for assets compulsorily acquired, lost or destroyed.

Section 124-70 describes different events when a roll-over is available. Of relevance is subsection 124-70(1), that allows an entity to choose a roll-over if the CGT asset that the entity owns 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.

If you received money as compensation, section 124-75 provides further requirements which must be satisfied to be eligible for a rollover.

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

Subsection 124-75(3) states that at least some of the expenditure must be incurred:

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

The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998, which introduced the rewritten provision states:

Section 124-75 Other requirements if you receive money

This section lists additional requirements that need to be met before roll-over relief is available for the compulsory acquisition, loss or destruction of an asset.

Change

State that only some of the expenditure incurred on acquiring a new asset, or on repairs or restoration of the original asset must be incurred within the specified time.

Explanation

The 1936 Act requires expenditure on acquiring a new asset, or on the repair or restoration of the original asset to be incurred within a specified time of the disposal of the original asset. It is unclear whether it is the total expenditure, or only a part of it, that must be incurred within this period. The rewritten provision adopts current administrative practice that only some of the expenditure must be incurred within the specified time.

Special circumstances - TD 2000/40

In determining whether special circumstances exist for the Commissioner to extend the period in which to incur expenditure on a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? ('TD 2000/40') provides guidance on interpreting subsection 124-75(3).

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.

Example 3 in TD 2000/40 provides an illustration of when the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

6. 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.

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

•         any unsettling of people, other than the Commissioner, or of established practices

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

•         whether there is any mischief involved, and

•         a consideration of the consequences.

Same or similar purpose

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.

The special rules in subsection 124-75(4) state:

(4)             If just before the event happened the original asset:

(a)             was used in your business; or

(b)             was installed ready for use in your business; or

(c)             was in the process of being installed ready for use in your business;

the other asset must be used in the business, or be installed ready for use in the business, for a reasonable time after you acquired it.

Otherwise, you must use the other asset (for a reasonable time after you acquired it) for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event happened.

Additionally, just after the acquisition, the replacement asset cannot become:

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

•         a registered emissions unit.

Application to your circumstances

The land owned by the Trustee was compulsorily acquired with the CGT event occurring on DDMMYYYY in the YYYY income year. From that time the Taxpayer has actively sought a replacement asset and since the last extension of time was granted, the Taxpayer has acquired land that settled on DDMMYYYY. This land requires significant development before it is suitable for use in the business. Its location has meant that there have been additional requirements that need to be satisfied before construction of a business premises can commence.

In these circumstances the special rules in subsection 124-75(4) are not yet satisfied. The Taxpayer's use of the Acquired Property in their business or for the same or similar purpose to the original asset, is contingent on factors outside of the Taxpayer's control that may never eventuate. The Taxpayer requires government approval, further compensation and to undertake extensive building works before the Acquired Property can qualify as a replacement asset for the rollover. This means that it is uncertain whether any of the expenditure already incurred in relation to the Acquired Property is expenditure of the relevant kind. If ultimately the Acquired Property does not qualify as a replacement asset, the Taxpayer will seek to acquire a more appropriate property. This cannot take place until the quantum of compensation is finalised.

In the case of the Taxpayer, there are special circumstances that warrant further time to incur expenditure in acquiring a replacement asset under paragraph 124-75(3). Of relevance is the on-going dispute between the Taxpayer and the government authority over the quantum of the compensation. The building of the business premises is contingent on compensation being received from the Victorian Government to progress its construction. This is currently an ongoing claim that is not expected to be resolved by 30 June 2024. Like Example 3 in TD 2000/40, a protracted legal dispute with the authority over the quantum of the compensation was considered a special circumstance, similarly, the Taxpayer's delay has also been caused in part by a dispute on the quantum of compensation and is considered a special circumstance.

As the Taxpayer is still in dispute with the government authority over the quantum of compensation for the compulsory acquisition of the CGT asset and the Taxpayer has been actively seeking suitable replacement assets, the Commissioner will exercise the discretion under paragraph 124-75(3)(b) to extend the time for the Taxpayer to incur expenditure on a replacement CGT asset.