Edited version of private advice

Authorisation Number: 5010084863083

Date of advice: 21 June 2022

Ruling

Subject: CGT replacement asset roll-over

Question

Will the Commissioner exercise his discretion to allow the Taxpayer an extension of time until 30 June 20cc to acquire a replacement asset pursuant to subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997)[1]?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20cc

The scheme commences on:

1 July 20bb

Relevant facts and circumstances

1.         The Taxpayer purchased a commercial property (Commercial Property 1) on 1 March 20xx. The property was used to generate rental income.

2.         On 4 November 20xx, Commercial Property 1 was compulsorily acquired by a State Government Authority for a disclosed amount.

3.         On 17 February 20yy, the Taxpayer purchased Commercial Property 2.

4.         The Taxpayer also entered into a contract for the purchase of Commercial Property 3. However, the contract fell through and the Taxpayer was not able to purchase this property.

Previous extensions of time:

5.         On 13 May 20yy, the Taxpayer applied for a private binding ruling in which they sought the Commissioner's discretion to allow an extension of time until 30 June 20yy to purchase a replacement asset. In this application, the Taxpayer explains that although they had entered into a contract to purchase a second replacement asset, being Commercial Property 3, the purchase had fallen through.

6.         On 10 July 20yy, the Commissioner allowed the Taxpayer an extension of time until 30 June 20zz to purchase a second replacement asset in accordance with subsection 124-75(3).

7.         The Taxpayer applied for a second private binding ruling on 4 May 20zz in which they sought for the Commissioner to again exercise his discretion to extend the time period for the purchase of a replacement asset until 30 June 20aa. In this application, the Taxpayer explained that as a result of the impact of COVID-19 on the property market, specifically the national lockdowns, decrease in property listings and increase in prices, made it difficult for them to identify and acquire a suitable replacement asset.

8.         On 29 May 20aa, the Commissioner allowed the Taxpayer an extension of time until 30 June 20aa for the purchase of a second replacement asset in accordance with subsection 124-75(3).

Current request for an extension of time:

9.         During the second extended replacement period, the Taxpayers identified a suitable replacement asset located at Commercial Property 3 (comprising of Units A and B). Although a contract of sale was entered into, with the Taxpayer signing the contract, it was not completely executed.

10.      In January 20bb, the Taxpayer's business located at Commercial Property 4 was affected by a flood. Due to the flood damage to this business, and associated stress experienced by the Taxpayer, the Taxpayer sought an extension of time to complete the negotiations, and execution, for the purchase of the Commercial Property 3. Their request for an extension of time was not accepted by the vendor and 50% of Commercial Property 3 was sold to an unrelated purchaser. As 50% of the property was sold to an unrelated purchaser, it was no longer a viable replacement asset for the Taxpayer.

11.      The Taxpayer explains that they are still keen to locate a suitable replacement asset. Once a property has been purchased, it will be used for a similar purpose as Commercial Property 1, being the generation of rental income.

12.      On 7 May 20bb, the Taxpayers submitted the current request for an extension of time to purchase a replacement asset, due to the special circumstances explained in paragraphs 9 to 11, until 30 June 20cc.

Relevant legislative provisions

Subsection 102-5(1) of the Income Tax Assessment Act 1997

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-5 of the Income Tax Assessment Act 1997

Subsection 104-10(3) of the Income Tax Assessment Act 1997

Subsection 108-5(1) of the Income Tax Assessment Act 1997

Division 124 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will the Commissioner exercise his discretion to allow the Taxpayer an extension of time until 30 June 20cc to acquire a replacement asset pursuant to subsection 124-75(3) of the ITAA 1997?

EXPLANATION OF THE LEGISLATION

CAPITAL GAINS TAX

13.      Subsection 102-5(1) provides that the assessable income of a taxpayer includes any net capital gains made during the income year.

14.      Section 102-20 provides that a taxpayer may make a capital gain or loss when a CGT event occurs to a capital gains tax (CGT) asset. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as being any kind of property or a legal or equitable right that is not property.

CGT Event A1

15.      Section 104-5 sets out a list of CGT events. CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1). Subsection 104-10(2) states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity.[2]

16.      Paragraph 104-10(3)(a) of the ITAA 1997 provides that the timing of the CGT event will be when the contract to dispose of the asset is entered into by the taxpayer. Paragraph 104-10(3)(b) explains that if there is no contract, the time of disposal will be when the change of ownership occurred.

Rollover relief for compulsory acquired, lost or destroyed CGT assets

17.      In certain circumstances, if a taxpayer ceases to hold a CGT asset and commences owning another CGT asset, they are able to defer the capital gain or loss from the first CGT event to a later CGT event pursuant to Division 124. This is known as a replacement asset roll-over.

18.      Section 124-70 lists a number of circumstances where a taxpayer can choose for a replacement asset roll-over for a CGT event. In particular, paragraph 124-70(1)(a) provides that roll-over is available to a taxpayer who owns a CGT asset that has been compulsorily acquired by an Australian government agency.

a.         The term Australian government agency is defined in subsection 995-1(1) as:

(a)  The Commonwealth, a State or Territory, or

(b)  An authority of the Commonwealth or of a State or Territory.

b.         The CGT asset compulsorily acquired[3] must be taxable Australian property just before the acquisition.

19.      Subsection 124-70(2) provides that the compensation received by the taxpayer must receive money, or another CGT asset[4], as compensation for the CGT event happening.

20.      Where money has been received for the CGT event, section 124-75 provides for a number of other conditions that must also be met to allow a taxpayer to choose to obtain roll-over relief. Specifically, subsection 124-75(2) provides that the taxpayer must incur expenditure in acquiring another CGT asset

21.      Subsection 124-75(3) further provides that at least some of the expenditure must be incurred, unless further time is allowed by the Commissioner under special circumstances, by:

a.         no earlier than one year before the event occurred, or

b.         no later than one year after the end of the income year in which the event occurred.

What is meant by the term 'special circumstances'?

22.      As explained by 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 (TD 2000/40) at paragraph 1, the expression 'special circumstances' is by its nature incapable of a precise or exhaustive definition. Paragraph 3 further explains that what is considered to be special circumstances will depend on the specific facts of each particular case.

23.      The examples provided by TD 2000/40 give additional guidance on what would be considered special circumstances by the Commissioner. For instance, example 1 outlines a situation where Amanda and John own a saddle shop that has been compulsorily acquired a State authority. The compensation was not received by Amanda and John until one month before subsection 124-75(3) required them to replace the shop and therefore, they are not able to acquire a replacement asset within this short period of time. In this example, the Commissioner would accept that the delay in receiving the compensation would constitute special circumstances warranting an extension of time.

24.      Similarly, example 2 of TD 2000/4 explains a situation where Gordon had his wool processing factory destroyed by fire. Immediately after the fire, he commenced proceedings for the purchase of a nearby factory however, after lengthy negotiation, the purchase of this factory fell through. Gordon purchases another factory however, the purchase was outside the 2 year period. In this example, it is accepted that Gordon took action to reasonably acquire the replacement asset and the Commissioner allowed him additional time.

25.      Example 3 of TD 2000/40 outlines another case in which it would be accepted that special circumstances would exist. In this example Graeme's commercial property was compulsorily acquired by a State authority. He was in protracted legal disputes with the State authority regarding the quantum of the compensation figure. Based on these facts the Commissioner would accept that there are special circumstances to allow further time, pursuant to subsection 124-75(3).

Extension of time due to special circumstances

26.      As mentioned earlier, subsection 124-75(3) provides that at least some of the expenditure must be incurred on a replacement asset, unless further time is allowed by the Commissioner under special circumstances, by:

a.         no earlier than one year before the event occurred, or

b.         no later than one year after the end of the income year in which the event occurred.

27.      Neither the legislation nor TD 2000/40 provide guidance regarding how much additional time would generally be acceptable for the Commissioner in the case of special circumstances.

Special rules if another asset is acquired

28.      Subsection 124-75(4) provides for special rules in the event that another asset has been acquired. In particular, subsection 124-75(4) provides that if the original asset was:

a.         used in the taxpayer's business

b.         installed ready for use in the taxpayer's business, or

c.         in the process of being installed ready for use in the taxpayer's business

just before the event happened, the other asset must be used in the business or, installed ready for use in the business, for a reasonable time after the taxpayer acquired it. Otherwise, subsection 124-75(4) provides that the taxpayer must use the other asset for the same, or similar, purpose for which the original assets was used prior to the event happening.

29.      Subsection 124-75(5) and (6) provide that the other asset cannot:

a.         become an item of trading stock after it's been acquired

b.         be a depreciating asset[5], or

c.         become a register emissions unit after it's been acquired.

Application to your circumstances:

30.      The disposal of the Commercial Property 1 by the Taxpayer through compulsory acquisition to a State Government Authority satisfies section 104-5 such that CGT event A1 occurred.

31.      In order to choose to roll-over the capital gain associated with the disposal of the Commercial Property 1, the Taxpayer must satisfy the relevant provisions in Division 124. In relation to an asset compulsorily acquired, the Property must have been acquired by an Australian government agency. As this occurred,paragraph 124-70(1)(a) is satisfied.

32.      Furthermore, subsection 124-70(2) is also satisfied as a result of the Taxpayer receiving a disclosed amount of money as compensation for the CGT event happening.

33.      Although the Taxpayer has purchased one replacement asset within the first extended time period provided by the Commissioner, the purchase of additional replacement asset fell through during the second extended time period. The Commissioner accepts that the reason for the failure to purchase of a replacement asset during the second replacement asset was due to special circumstances, being that:

a.         during the extended time period, the Taxpayer's business located at Commercial Property 4 was flooded

b.         due to the flood damage to this business, the general impact of the flooding and the associated stress experienced by the Taxpayer, the Taxpayer sought an extension of time to complete the negotiations for the purchase, and the execution of any documents, of the Commercial Property 3

c.         the extension request was not accepted by the vendor and half the property was sold to an unrelated party, making the property no longer suitable for the Taxpayer's needs, and

d.         subsequent to this, the Taxpayer has not been able to locate a suitable replacement asset prior to the expiration of the second extension period granted by the Commissioner.

34.      Consequently, the Commissioner has granted an extension until 30 June 20cc to allow the Taxpayer to purchase a replacement asset pursuant to subsection 124-75(3).

[1] All future legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated.

[2] However, subsection 104-10(2) of the ITAA 1997 also provides that a change in ownership will not occur is the taxpayer ceases to be the legal owner of the asset but continues to be its beneficial owner.

[3] And other events listed in section 124-70.

[4] except a car, motor cycle or similar vehicle.

[5] whose decline in value is worked out under Division 40 of the ITAA 1997 or deductions for which are calculated pursuant to Division 328.