Private ruling: Capital Gains Tax - Replacement Asset Rollover
Date of advice: 21 February 2017
Published: July 2017
Ruling period: Year ended 30 June 20xx | Year ended 30 June 20xx | Year ended 30 June 20xx | Year ended 30 June 20xx | Year ended 30 June 20xx
Date scheme commenced: 10 March 20xx

Ruling: Q1: Will the Commissioner exercise his discretion pursuant to Subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time in which to spend some of the proceeds following the compulsory acquisition of the taxpayer's asset in order to meet the eligibility requirements for a Subdivision 124-B roll-over? | A1: Yes | Q2: If the taxpayer is successful in receiving an extension of time from the Commissioner in respect of Question 1 above, will the Commissioner allow a further time until 30 June 20xx for the taxpayer to acquire a replacement asset? | A2: Yes

Relevant facts and circumstances: Background 1. The taxpayer is an Australian company which invests in non-residential land and property which is then leased, generating rental income. 2. In xxx 20xx, the taxpayer received notice from an Australian government agency advising that their interest in their landholdings was to be compulsorily acquired, as pursuant to the Relevant Act 1993 (X), for the purposes of the motorway construction. 3. In xxx 20xx, an acquisition notice was published in the Government Gazette to effect the compulsory acquisition of the landholdings. 4. In xxx 20xx, the taxpayer lodged a Claim for Compensation under the Land Acquisition (Just Terms Compensation) Act 1991 for a certain amount. 5. In xxx 20xx, a Deed for Advance Payment under the Land Acquisition (Just Terms Advance Payment) Act 1991 was entered into by the Australian government agency and the taxpayer. The Australian government agency will pay Advance Money to the taxpayer as part compensation for the compulsory land acquisition. 6. In xxx 20xx, the Australian government agency wrote to the taxpayer and offered them an amount (the offer ) in compensation for the compulsorily acquired landholdings. The Australian government agency also enclosed a compensation notice, the Valuer-General's determination, acquisition notice published in the Government Gazette, and a deed of release and indemnity. 7. The compensation notice also informed that the Australian government agency was dissolved and the liability for compensation vested in another Australian government agency. 8. The taxpayer is not satisfied with the offer and is currently in negotiations with the new Australian government agency in order to reach an agreement for the price of the landholdings. 9. The compensation notice states that if an objection is lodged with an Australian court, X% of the offer will be paid within 28 days after notice of institutional proceedings is given to the Australian government agency. As such, the taxpayer has received X% of the offer in respect of the landholdings. 10. In good faith and whilst in continuous discussions and negotiations with the Australian government agency, the taxpayer has searched for suitable properties in anticipation of a prompt resolution. 11. The taxpayer intends to utilise the Capital Gains Tax (CGT) roll-over provisions found in Subdivision 124-B of the ITAA 1997 in respect of the compulsory acquisition of its landholdings. 12. The taxpayer also intends to purchase property to replace the compulsorily acquired landholdings and will be leased in a similar manner to the previously owned property. As such, the replacement asset will be used for the same purpose as the original asset. 13. The taxpayer will only be able to acquire the replacement asset once the compensation negotiation concludes and it has clarity on the ultimate compensation amount it will receive. 14. The taxpayer has allowed for a period of one to two years in order to locate and acquire a suitable replacement asset given that: ● The landholdings which were compulsorily acquired were large commercial plots that were occupied by high quality tenants and achieved strong rental yields, and such properties are not frequently available for sale on the market. Given this and the quantum of compensation, it may take the taxpayer a substantial period of time to identify an acceptable property that can achieve a similar rental yield that becomes available for sale and to negotiate the purchase. ● Given the uncertainty with respect to the final quantum of the compensation proceeds, the taxpayer does not have clarity on the amount that they will have available to spend on the replacement property. 15. The taxpayer had lodged an objection to the offer with an Australian court and as a result it has been delayed in purchasing a replacement asset. The taxpayer affirms that the final compensation amount for the landholdings is yet to be determined by the court. Until the legal dispute is resolved and the taxpayer knows with certainty the ultimate compensation amount they will receive, they will not be in a position to acquire the replacement assets. 16. As the replacement assets will be used for the same purpose for which the taxpayer used the landholdings, it maintains that the replacement assets need to be large commercial plots and achieve strong rental yields, but these properties are infrequently available for sale on the market. 17. Given this and the uncertainty of the final quantum of compensation, it may take the taxpayer an ample period of time to identify an acceptable property that becomes available for sale and to negotiate the purchase. Thus, the taxpayer has requested an extension of time until 30 June 20xx to enable them to locate and acquire an acceptable replacement asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(6), | Income Tax Assessment Act 1997 Subsection 124-70(1), | Income Tax Assessment Act 1997 Subsection 124-70(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 124-75(5), | Income Tax Assessment Act 1997 Subsection 124-75(6) and | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: The Commissioner will exercise his discretion pursuant to Subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time in which to spend some of the proceeds following the compulsory acquisition of the taxpayer's asset in order to meet the eligibility requirements for a Subdivision 124-B roll-over. | Detailed Reasoning - Detailed reasoning: 1. If a change of ownership triggers CGT event A1 as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition, subsection 104-10(6) of the ITAA 1997 provides that the time of the event is the earliest of when compensation is received or when the change of ownership occurs. 2. Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met. 3. Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency. 4. A replacement-asset rollover allows an entity, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. 5. Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. 6. A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for rollover (subsection 124-70(2) of the ITAA 1997). On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening. 7. Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) of the ITAA 1997 requires the entity to incur at least some of the expenditure in acquiring this replacement CGT asset 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. 8. Subsection 124-75(4) of the ITAA 1997 requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. This replacement asset cannot become trading stock just after the acquisition or be a depreciating asset (subsection 124-75(5) of ITAA 1997), nor become a “registered emissions unit” just after the acquisition (subsection 124-75(6) of ITAA 1997). 9. In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, regard must be had to Taxation Determination TD 2000/40 (TD 2000/40) which provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what are 'special circumstances'. 10. TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case. 11. Example 3 in TD 2000/40 is relevant in this case. It provides an illustration in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer. 12. In determining if his discretion will be exercised, the Commissioner also considers 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. 13. Applying the relevant legislation to the present case, subdivision 124-B allows the taxpayer to choose rollover relief for its landholdings (CGT assets) compulsorily acquired by the Australian government agency, as they received money from the Australian government agency as part compensation. The compulsory acquisition by the Australian government agency of the taxpayer's landholdings satisfies the conditions in subsection 124-70(1) of the ITAA 1997. The receipt of monetary compensation as advance payment for compulsory acquisition of the landholdings met the conditions of subsection 124-70(2) of the ITAA 1997. 14. Under subsection 104-10(6) of the ITAA 1997, CGT event A1 occurred when the Australian government agency took possession of the landholdings in July 2015 when it was gazetted and the change of ownership of the asset occurred. Under paragraph 124-75(3)(b) of the ITAA 1997 the taxpayer would need to acquire a replacement asset no later than one year after the end of the income year in which the gazettal took place, that is until 30 June 20xx. 15. However, due to special circumstances of the taxpayer, mainly because of its ongoing dispute with the Australian government agency, it was not feasible for the taxpayer to acquire a suitable replacement asset by the required time. Accordingly, the taxpayer requests the Commissioner's discretion to allow an extension of time in accordance with paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement asset. 16. The taxpayer has objected to the amount offered by the Australian government agency as compensation for the land compulsorily acquired, and has commenced proceedings to claim a greater amount under the Land Acquisition (Just Terms Compensation) Act 199 1. As such, purchasing a replacement asset has been delayed. 17. The lack of certainty as to the amount and timing of the compensation it will receive will also delay the taxpayer's ability to search and acquire an appropriate replacement asset. Furthermore, the specific nature of the asset to be replaced, the substantial amount to be invested, and the possibility of a lengthy process in respect of such an acquisition would mean that further delays in purchasing a replacement asset may be experienced. 18. Based on these facts, it is deemed that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset, as it would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay. 19. Also by granting this extension of time to acquire replacement asset: ● there does not appear to be any prejudice to the Commissioner or any other parties; ● there is no unsettling of people or of established practices; ● there does not appear to be any mischief involved in this case; and ● the Commissioner considers it to be fair to people in like positions and the wider public interest. 20. Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for landholdings that were compulsorily acquired by the Australian government agency. | Summary: The Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension until 30 June 20xx to obtain a replacement asset for landholdings that were compulsorily acquired by the Australian government agency. | Detailed Reasoning - Detailed reasoning: 21. As determined earlier, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow an extension of time to obtain a replacement asset for landholdings that were compulsorily acquired by the Australian government agency. 22. Neither the legislation or TD 2000/40 provide guidance regarding how much additional time would generally be acceptable for the Commissioner in the case of special circumstances. 23. Given your special circumstances discussed previously, the Commissioner considers that your request for an extension until 30 June 20xx would be acceptable.