Edited version of private advice

Authorisation Number: 1052363559866

Date of advice: 28 March 2025

Ruling

Subject: CGT - asset rollover

Question

Will the Commissioner exercise his discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time required to obtain a replacement asset for a compulsorily acquired asset?

Answer

No.

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

September 20XX

The scheme commenced on:

June 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes

You had owned an investment property for many years

During the year ended XX XXXX 20XX, a statutory authority of a relevant government informed you that the property was required for a construction of a project. The statutory authority informed you that they have powers to acquire land by a compulsory process

You were provided with an offer amount as compensation for this.

You did not agree to this amount

During the year ended XX XXXX 20XX,

•                     the statutory authority compulsorily acquired your property

During the year ended XX XXXX 20XX,

•                     it was determined that you should receive an advanced payment amount which included statutory interest.

•                     This amount was deposited into your bank account some months after the Property was compulsorily acquired.

•                     Prior to its compulsory acquisition, the Property was used as an investment property, and you derived rental income from this property

•                     You came to an agreement with the statutory authority on a final compensation amount

During the year ended XX XXXX 20XX,

•                     you received the final payment which included statutory interest

•                     you did not look for a replacement property as your main focus was to pay your debts

•                     the property market in your area was booming

•                     you only monitored prices, you did not make any offers

•                     the statutory authority announced that the property was no longer require

•                     the statutory authority offered to sell you back the property at its current market value at the time

During the year ended XX XXXX 20XX

•                     you were reminded of the statutory authorities offer to sell you back the property

•                     you responded that you were interested

During the year ended XX XXXX 20XX

•                     the statutory authority apologised for lack of communication

•                     you receive the statutory authorities offer price for you to purchase the property back

•                     you accepted this offer

During the year ended XX XXXX 20XX

•                     A letter was sent to the current tenants of the property to advise new ownership

•                     Settlement of the property occurred

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 subsection 124-70

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

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 section 100-33

Income Tax Assessment Act 1997 section 104-10

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

Tax Determination TD 2004/40

Reasons for decision

Capital gains and losses

Section 100-20 of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens.

This section also makes it clear that the specific time of when the CGT event happens is important, particularly for working out in which income year a capital gain or loss occurred.

In specific situations, you may be able to defer or disregard a capital gain or loss from a CGT event by availing yourself of a roll-over.

Section 100-33 of the ITAA 1997 provides that there are two types of roll-overs:

replacement-asset roll-over, which allows you to defer a gain or loss from one CGT event until a later CGT event where an asset is replaced with another asset

same-asset roll-over, which allows you to disregard a gain or loss from a CGT event where the same asset is involved.

CGT event A1

Section 104-10 of the ITAA 1997 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 capital gain or loss is made at the time of the event.

Did CGT event A1 occur?

You involuntarily disposed of the property you owned because it was compulsorily acquired by a statutory authority.

Subsection 104-10(6) provides that if an asset was acquired from you by an entity under a compulsory acquisition power conferred by Australian law, the time of the event is the earliest of:

•                     when you received compensation for the acquisition

•                     when the entity became the owner of the asset

•                     when the entity entered the asset under the relevant power

•                     when the entity took possession under that power.

Applicable to your circumstances

Consequently, CGT event A1 occurred in respect of the Property when it was compulsorily acquired on X XXXX 20XX.

Replacement-asset roll-overs

Division 124 of the ITAA 1997 contains the replacement-asset roll-overs that allow you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event.

A replacement-asset roll-over may be available when you give up, surrender, or relinquish an asset you own, or your ownership ends in some other way, and as part of the same circumstances you receive another asset to replace the original asset.

When a roll-over is available

Subdivision 124-B of the ITAA 1997 contains a roll-over for when assets are compulsory acquired, lost or destroyed. Section 124-70 of the ITAA 1997 sets out the circumstances in which the roll-over relief may be available. You must make a positive choice to avail yourself of the roll-over under section 124-70.

Paragraph 124-70(1)(a) provides that you may be able to choose a roll-over if a CGT asset you own is compulsorily acquired by an Australian government agency.

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.

If you received money as compensation for the involuntary disposal of a CGT asset, you must incur expenditure to acquire another CGT asset (but not certain depreciating assets) to avail yourself of the roll-over. Generally, the expenditure must be incurred within a period starting one year before the compulsory acquisition event and ending one year after the end of the income year in which the event occurred.

If the original asset was used as investment property earning rental income immediately prior to its compulsory acquisition, the newly acquired asset or assets must be used as investment property earning rental income for a reasonable time after you acquire it. Otherwise, you must use the other asset for the same purpose, or for a similar purpose to, the purpose for which you used the original asset just before it was compulsorily acquired.

Was the Property acquired by an Australian government agency?

For the purposes of subdivision 124-B, "Australian government agency" takes its meaning from subsection 995-1(1) of the ITAA 1997:

(a) the Commonwealth, a state or a territory, or

(b) an authority of the Commonwealth or of a state or territory.

In FC of T v Bank of WA Ltd, FC of T v State Bank of NSW Ltd,Hill J listed some of the relevant issues with determining whether an entity is a public authority. Hill J stated that for an entity to be an authority of a state or the Commonwealth, the entity must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must exist to achieve a government purpose. Hill J also stated the entity must perform a traditional or inalienable function of government and have governmental authority for doing so.

The relevant entity was a statutory authority of a state government and constituted by state legislation.

As the statutorily authority is constituted by an Act and it executes a function in the public interest and to achieve government purposes, we consider that it is an Australian government agency.

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

Did you incur expenditure to acquire another CGT asset?

Applicable to your circumstances

You received money as compensation for the compulsory acquisition of the Property. Consequently, you must have incurred expenditure to acquire another asset to avail yourself of the roll-over provided for in subdivision 124-B.

As immediately prior to its compulsory acquisition the Property was used as investment property earning rental income, any new asset you acquire as a replacement asset must also be used as an investment property earning rental income.

Following the compulsory acquisition of the Property, you incurred expenditure in acquiring at least one property. The property you acquired as a replacement asset is used as investment property earning rental income.

Is the replacement-asset roll-over available to you?

In the year ended XX XXXX 20XX, CGT event A1 happened in respect of the Property as it was compulsorily acquired by the statutory authority.

This event gave rise to a capital gain.

Capital gains or losses can be deferred or disregarded in specific situations by availing yourself of a roll-over.

Subdivision 124-B of the ITAA 1997 sets out the requirements for roll-over relief when an asset is compulsorily acquired. There are specific requirements for when you receive money as compensation.

You incurred expenditure to acquire a replacement CGT asset, this newly acquired asset is being used as an investment property earning rental income. However, the expenditure was not incurred within one year after the end of the income year in which the compulsory acquisition occurred, due to special circumstances. For a replacement-asset roll-over in subdivision 124-B to be available to you, the Commissioner must exercise the discretion to allow a longer period due to the special circumstance

Timing of the expenditure to acquire a new CGT asset

As discussed above,subsection 124-75(3) of the ITAA 1997 requires that for you to avail yourself of the replacement-asset roll-over provided for in subdivision 124-B of the ITAA 1997, you must incur expenditure in acquiring another CGT asset within a period starting one year before the compulsory acquisition and ending one year after the end of the income year in which the compulsory acquisition occurred.

However, in special circumstances, paragraph 124-75(3)(b) gives the Commissioner the discretion to allow further time after the end of the income year in which the compulsory acquisition occurred for the expenditure to be incurred.

What are special circumstances?

Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997 sets out the Commissioner's views on what special circumstances are for the purposes of the replacement-asset roll-over in subdivision 124-B.

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

Are there special circumstances in your case?

Since the Property was compulsorily acquired, and you did not agree with the compensation amount you engaged a solicitor.

You came to an agreed amount within the X months after the property was compulsory acquired

You received the final amount of the compensation payment X months outside the X months period allowed.

You eventually re-purchased the property that had been compulsory acquired, which you continue to use as an investment property as you did prior to the compulsory acquisition.

Considering the circumstances of your situation, it is reasonable to conclude that you have meet the special circumstances under section 124-75(3)

Will the Commissioner allow further time?

Where there were special circumstances, the Commissioner will allow further time for expenditure to be incurred in acquiring another CGT asset.

Because of the special circumstances in your case, the Commissioner will allow further time until X XXXX 20XX, pursuant to paragraph 124-75(3)(b) of the ITAA 1997, for you to incur expenditure in acquiring another CGT asset.