Edited version of private advice

Authorisation Number: 1052291058601

Date of advice: 23 August 2024

Ruling

Subject: Commissioner discretion - extension of time

Question 1

Was a CGT asset compulsorily acquired by an Australian government agency?

Answer

Yes.

Question 2

Did the compulsory acquisition of the property give rise to a capital gain event?

Answer

Yes.

Question 3

If the Taxpayer receives money, will the Taxpayer receive the money as compensation for the event happening?

Answer

Yes.

Question 4

Will the Commissioner of Taxation exercise his discretion to allow the Taxpayer an extension of time of 12 months to incur expenditure on a replacement CGT asset under subsection 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) from the date the compensation is received?

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 Taxpayer is the trustee of Family Trust (Taxpayer).

The Taxpayer owns Property.

The Property is situated in Australia.

The Taxpayer acquired the Property after 20 September 1985.

The Property is taxable Australian property for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997).

On DDMMYYYY, pursuant to section 191 of the Planning and Development Act 2005, the Authority registered a Taking Order.

The effect of this Taking Order was that X% of the total property were compulsorily acquired by the Authority.

The Taxpayer was also required under the Taking Order to demolish the buildings on that part of the land that was compulsorily acquired under the Taking Order.

The Taxpayer completed demolition of the buildings in early 20YY.

The Planning and Development Act (2005) (Planning Act) entitles owners of land to compensation for land compulsorily taken under section 191 of that Act. The Taxpayer lodged an application for compensation within the time required under the Planning Act.

Due to various court challenges to the taking order the application for compensation could not be processed by the Authority until its legal position was determined by the Supreme Court.

The Taking Order was established as effective and valid on DDMMYYYY.

The Taxpayer is currently waiting on expert reports, for the purpose of instructing the valuer to reconsider their initial valuation report and advise about the final amount of compensation which ought to be received. This is expected to be completed sometime in the 20XX income year.

Currently, the Taxpayer cannot determine the amount of and when it will receive the proceeds arising from the Taking Orders.

The initial valuation report valued the compensation at $XXX,XXX.

The Taxpayer is unable to acquire a replacement asset until the following occurs:

•         the relevant expert reports are completed

•         the valuers of the initial valuation report can reconsider their valuation of the property, and

•         the compensation to be received is agreed upon and finalised.

The Taxpayer is requesting an extension of 12 months of time to incur expenditure on a replacement CGT asset.

In preparing the income tax return for the Taxpayer for the year ended 30 June 20XX, income tax return was prepared on the basis that:

a.            the consideration received for the purposes of determining the net capital gain on the property compulsorily acquired is $ XXX,XXX as stated in the initial valuation report

b.            the Taxpayer realised a capital on the disposal of the land compulsorily acquired

c.            the taxpayer is eligible and has elected to apply the rollover relief in accordance with Subdivision 124-B of the ITAA 1997

d.            the Commissioner will exercise his discretion to allow the Taxpayer an extension of time to acquire a replacement asset

e.            the taxpayer will acquire a replacement asset within the timeframe requested.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 subsection 104-10(5)

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

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)

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

Reasons for decision

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

Question 1, 2 3 and 4

Summary

The Property was compulsorily acquired by an Australian government agency triggering CGT event A1. As the Taxpayer is yet to receive money to compensate for the compulsory acquisition of the Property due to court challenges, 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 until 12 months after the date the compensation is received.

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

Compulsory acquisition by an Australian government agency

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 Authority, a government board established under the Planning and Development Act 2005. On the basis that the Authority is a government board established under state law it is accepted that it is a state government agency that falls within the definition of an Australian government agency for the purposes of subsection 995-1(1) and subsection 124-70(1).

On DDMMYYYY, pursuant to section 191 of the Planning Act, the Authority registered a Taking Order. The effect of this Taking Order was that parts of the Property, being X% of the total property were compulsorily acquired by an Australian government agency.

CGT event A1 was triggered when the compulsory acquisition happened.

The effect of CGT event A1 happening is that a capital gain is made if the capital proceeds from the disposal is more than the asset's cost base, or a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(5)).

The time of CGT event A1 was DDMMYYYY when the taking order allowed the Authority to take possession of the land.

As a capital gain has been derived, the net capital gain is included in the Taxpayer's assessable income under section 102-5, for the income year ended 30 June 20XX.

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 where 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.

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, or

•         a 'registered emissions unit'.

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.

Application to your Circumstances

The Property was compulsorily acquired by an Australian government agency triggering CGT event A1.

You indicate the Taxpayer is entitled to compensation for the compulsory acquisition of the Property under the Planning Act and has lodged an application for compensation within the time required under that legislation. Although the Taxpayer has not received any money the initial valuation report valued the compensation at $XXX,XXX.

Various court challenges to the Taking Order delayed the application for compensation until the legal position was determined by the Supreme Court. The Taxpayer is currently waiting on expert reports, for the purpose of instructing the valuer to reconsider their initial valuation report and advise about the final amount of compensation which ought to be received. This is expected to be completed sometime in the 20XX financial year.

The Taxpayer is unable to incur expenditure on a replacement asset until the relevant expert reports are completed, the valuers of the initial valuation report can reconsider their valuation of the property and the compensation to be received is agreed upon and finalised.

These factors indicate special circumstances that warrant an extension of the period in which to incur expenditure on a replacement asset. 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 by a legal dispute and the agreement on the quantum of compensation.

As the Taxpayer is yet to receive money to compensate for the compulsory acquisition of the Property due to court challenges, 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 until 12 months after the date the compensation is received.