Edited version of private advice

Authorisation Number: 1052288221436

Date of advice: 13 August 2024

Ruling

Subject: Commissioner's discretion - replacement asset

Question

Will the Commissioner exercise the discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time to 30 June 2025 to acquire a replacement asset?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

X April 20XX

Relevant facts and circumstances

Individual A is the trustee Trust 1.

Individual B is a director of Entity 1 which is the trustee of Trust 2.

Trust 1 and Trust 2 jointly owned the Property.

On X December 20XX a Government Department made an offer of early, compulsory acquisition.

Trust 1 and Trust 2 accepted the offer and a contract of sale was signed.

The property had a tenant who leased and operated a business on the property. The tenant had not obtained the necessary council approvals for their renovations which included a new mezzanine and bathroom. This caused delays as the Government Department would not settle until this matter was resolved.

A notice of appeal was lodged between the business tenant and the City Council.

The Court handed down judgement on the appeal.

A second appeal was lodged to the Court by the business tenant against the City Council.

At a later time, the business tenant withdrew their appeal and a notice of discontinuance was handed down. Simultaneously the tenancy was ended.

Sometime later, the tenant vacated the premises and the issues with the property were resolved.

The property settled, almost a year after the contract for disposal was signed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 section 124-75

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

Reasons for decision

Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met.

An entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency as per paragraph 124-70(1)(a) of the ITAA 1997. A replacement-asset rollover allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

If you receive money for a CGT event happening, you can choose to obtain a roll-over if you incur expenditure in acquiring another CGT asset.[1]

You must incur expenditure no earlier than 12 months before the event or 12 months after the event unless the Commissioner grants extra time.[2]

The replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset.[3]

The Commissioner provides guidance in Tax Determination 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997?

Specifically, example 3 which provides:

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.

Application to your circumstances

You received compensation for the property acquisition. However, due to delays caused by legal issues, you did not receive the funds until settlement which almost a year after contract of sale was signed. As you did not have the funds to expend, you have been unable to secure a suitable replacement asset within the 12-month period.

Therefore, given that there are special circumstances that contributed to a delay in purchasing a suitable replacement property, the Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension of time to obtain a replacement asset.

1 ITAA 1997 subsection 124-75(1) and paragraph 124-75(2)(a).

2 ITAA 1997 subsection 124-75(3).

3 ITAA 1997 subsection 124-75(4).