Edited version of private advice

Authorisation Number: 1052352443522

Date of advice: 23 January 2025

Ruling

Subject: Replacement asset rollover - compulsory acquisition

Question

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

Answer

Yes.

Section 124-70 of the ITAA 1997 allows you to choose a roll-over in circumstances which include a CGT asset you own being compulsorily acquired by an Australian government agency or an entity (other than an Australian government agency) under a power of compulsory acquisition conferred by a Commonwealth law.

If you receive money as compensation, section 124-75 of the ITAA 1997 specifies that you must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) of the ITAA 1997 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.

Taxation Determination TD 2000/40 states that what are 'special circumstances' depends on the facts of each particular case. However, relevant circumstances may include where compensation is received some time after the compulsory acquisition takes place or where there is a protracted legal dispute in regard to the quantum of the compensation.

In your case, it is accepted that there were special circumstances, such as the timing of the compulsory acquisition and the date the initial compensation was received, that contributed to you not being able to acquire a replacement CGT asset within the specified time period.

Therefore, the Commissioner will exercise the discretion to extend the time for you to incur expenditure on a replacement CGT asset.

Section 124-85 of the ITAA 1997 sets out the consequences of obtaining a roll-over. If the money you receive exceeds the cost you have incurred to replace the original asset, you may have a CGT liability. The capital gain you include on your tax return depends on whether your capital gain from the compensation is more or less than the amount by which the compensation exceeds the cost of replacement.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You, along with 2 of your relatives, inherited rural land from your late parent.

Your parent acquired the land prior to 1985 and used it as a small working farm. There is a small house on the farm to stay overnight but it was not used as a main residence.

Since the property was inherited, it has been kept as a small hobby farm.

In late 20XX, you were served a notice of intent by the state government to resume the property.

The property was compulsorily acquired by the government about 6 months later.

During the entire process, you and your family have been in active negotiations with the government for compensation on the land, having engaged a law firm to assist with the process.

About 9 months after the compulsory acquisition, you and your relatives received an advance on the compensation for the land acquisition from the government, which was split three ways.

Since the receipt of the initial compensation, you have continued to negotiate with the government in regard to receiving additional compensation.

Throughout the whole process of negotiations with the government, your relatives have had significant health issues which also delayed attempts to find a replacement asset as soon as practically possible.

About 18 months after the compulsory acquisition, you and your relatives entered into a contract to purchase a similar rural block of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 section 124-75

Income Tax Assessment Act 1997 section 124-85