Private ruling: CGT - Commissioner's Discretion - Extension of time to acquire a replacement asset
Date of advice: 6 July 2016
Published: October 2016
Ruling period: Income year ended 30 June 2017 | Income year ended 30 June 2018 | Income year ended 30 June 2019
Date scheme commenced: Income year 2015-16

Ruling: Q1: Will the Commissioner exercise his discretion available under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 to provide an extension of time of three years to acquire a rollover replacement asset? | A1: Yes

Relevant facts and circumstances: A property was resumed by a State Agency on the date the Government Gazette was issued in 20XX. Prior to the time of compulsory acquisition of the property, the property was being used by the registered owners for their business purposes. There are several registered owners of the property The applicant has provided documents to substantiate the compulsory acquisition. The registered owners were given advance payment as part payment for the property. The final amount is yet to be settled sometime in the future once legal proceedings to ascertain the market value of the property have taken place in the land court, which may be a lengthy process.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 103-25 | Income Tax Assessment Act 1997 subsection 104-10(6) | Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 section 127-75 | Income Tax Assessment Act 1997 subsection 127-75(1) | Income Tax Assessment Act 1997 subsection 124-75(2) | Income Tax Assessment Act 1997 subsection 124-75(3) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - Involuntary disposal of a CGT asset: Section 124-70 describes different incidents when a roll-over is available to an entity if that incident happens to the Capital Gains Tax (CGT) asset of that entity. According to subsection 124-70(1), an entity is able 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) states that to be eligible for a roll-over, the entity must receive money or another CGT asset (except car, motor cycle or similar vehicle) or both as compensation for the event happening. 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 a State Agency and to date you received a partial payment of money as compensation for the acquisition. Therefore you are able to choose a roll-over in relation to the capital gain that you received from the compulsory acquisition, provided other requirements as stated in section 124-75 are met for receiving money as the compensation. According to section 124-75: 124-75(1) If you receive money for the event happening, you can choose to obtain a roll-over only if these other requirements are satisfied. 124-75(2) You must: (a) incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328) or; (b) if part of the original asset is lost or destroyed - incur expenditure of a capital nature in repairing or restoring it. 124-75(3) 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. In your case, your original asset, namely the property is not lost or destroyed. Therefore the relevant provision for you is paragraph 124-75(2)(a) whereby you are required to incur expenditure to acquire another CGT asset. Subsection 124-75(3) requires you to incur some of the expenditure either one year before or one year after the end of the income year in which the event happens or within such further time as the Commissioner allows. Since you have not incurred any expenditure within the given time, you have requested the Commissioner to exercise his discretion under this subsection for a three year extension to incur such expenditure in order to acquire another CGT asset. The time of the event is determined by subsection 104-10(6). The time of the event will be the earlier of: • when you received full compensation from the entity • when the entity becomes the asset's owner • when the entity entered it under that power, or • when the entity took possession under that power. In your case, your property has been compulsorily acquired. You have not received full compensation payment. However, the transfer of ownership of the property occurred in the relevant income year when the State Agency issued the Government Gazette providing the Taking of Land Notice for relevant purposes. The time of the event under subsection 104-10(6) is therefore when the government gazette was issued. You have not acquired a replacement CGT asset prior to transfer and therefore to satisfy subsection 124-75(3), a replacement CGT asset must be acquired no later than 30 June 20YY, being one year after the end of the income year in which the event happened (paragraph 124-75(3)(b)). You have requested further time until when full compensation is received from the council to satisfy the requirements of subsection 124-75(3). | Detailed Reasoning - Special circumstances: There are no legislative provisions which provide guidance as to what may constitute special circumstances for this purpose. What are the special circumstances depends on the facts of each particular case. In determining whether special circumstances exist that will allow the Commissioner to extend the period for you to acquire a replacement asset, regard must be had to 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). TD 2000/40 provides guidelines for interpreting subsection 124-75(3), in particular what are special circumstances and some examples of situations in which the Commissioner would, or would not, accept that special circumstances exist. In determining if the discretion would be exercised the Commissioner has considered the following factors: • there should be evidence of an acceptable explanation for the period of 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 • account must be had of 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. You are currently in negotiation with the State Agency as to the compensation that you should receive, once legal proceedings have taken place in the land courts. The applicant has advised that based on other proceedings in like situations, negotiations with the State Agency may be a lengthy process which may take several years to complete. Although you were paid an advance payment as part of the compensation amount, the final amount is yet to be determined. These circumstances are very similar to those discussed in Example 3 in TD 2000/40, where a commercial property was compulsorily acquired by a state authority and there is a protracted legal dispute with the authority over the quantum of the compensation. The example states that on these facts we would accept that there are special circumstances to allow further time. On the basis of the guidelines in TD 2000/40, it is considered that this situation is one of special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b). | Detailed Reasoning - Application to your circumstances: The legislation does not require that you spend the entire amount to be eligible for the replacement asset rollover. Subsection 124-75(3) requires that you incur some of the expenditure to acquire another CGT asset. However, not knowing for certain how much the final payment would be until the legal dispute is resolved, it is difficult for you to estimate how much you should spend to acquire a replacement asset or assets. This is an acceptable explanation for the period of extension requested. The Commissioner will grant the requested three years extension of time for you to obtain rollover relief and purchase a replacement asset. | Detailed Reasoning - Other relevant comments: The roll-over under Division 124 provides the taxpayer to either choose to exercise the roll-over or trigger the capital gain or capital loss in the income year in which the CGT event occurs. If the taxpayer chooses to obtain the roll-over, section 103-25 governs when and how the choice is made and the consequences are as set out in Division 124. At the end of the given extension period, if your situation still remain unsettled, you can apply again to the Commissioner for further extension for you to exercise the choice under section 103-25.