Private ruling: Capital gains tax - compulsory acquisition - replacement asset rollover
Date of advice: 4 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will the Commissioner allow you further time to 30 June 2016 under section 124-75 of the Income Tax Assessment Act ('ITAA 1997") to acquire a replacement capital gains tax ("CGT") asset following the compulsory acquisition of your original asset? | A1: Yes.

Relevant facts and circumstances: You acquired a one third share in a block of land after 20 September 1985. The land was held as tenants in common with two other people. The land was leased to an unrelated party. The land derived income from the tenant for a period of time. The land was used for farming. You became aware that the land was designated for compulsory acquisition in 200X. You and the other owners agreed to let the tenant use the land rent free until the land was compulsorily acquired. Your property was compulsorily acquired in 20XX by a State authority. You received payment as compensation of an amount prior to commencing legal proceedings in 20YY. The legal proceedings were subsequently settled by way of consent orders. You received a further amount in compensation in 20ZZ. You have subsequently acquired a number of replacement assets. You have inspected numerous replacement properties and have as yet not identified further appropriate replacement properties. You will purchase a variety of properties which will include any or all of the following: • A residential property that is vacant at the time it is acquired but to be used to derive rental income for a reasonable time. • A residential property that is subject to an existing lease and will continue to be leased and derive rental income for a reasonable time. • A commercial property that is vacant at the time that it is acquired but to be used to derive rental income for a reasonable time. • A commercial property that is vacant at the time that it is acquired but to be used to derive rental income for a reasonable time. • A vacant block (either residential or commercial) that is vacant at the time it is acquired but is to be used to derive rental income for a reasonable time until the land is developed; and • A vacant block (either residential or commercial) that is subject to an existing lease and will continue to be leased and used to derive rental income for a reasonable time until the land is developed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 124-70 | Income Tax Assessment Act 1997 Section 124-75 | Income Tax Assessment Act 1997 Subsection 124-75(2) | Income Tax Assessment Act 1997 Subsection 124-75(3) | Income Tax Assessment Act 1997 Paragraph 124-75(3)(a) | Income Tax Assessment Act 1997 Paragraph 124-75(3)(b).

Reasons for decision: Summary: You dispose of a CGT asset if ownership of the asset changes from you to another entity because of some act or event or by operation of law. Under subsection 104-10(6) of the ITAA 1997 the time of an A1 event brought about by the compulsory acquisition of an asset by an entity is the earliest of: (a) when you received compensation from the entity; or (b) when the entity became the assets owner; or (c) when the entity entered it under that power; or (d) when the entity took possession under that power. | Detailed Reasoning - Section 124-70 of the ITAA 1997: Involuntary disposal of a CGT asset: Under subsection 124-70(1)(a) you may be able to choose a roll-over if a Capital Gains Tax (CGT) asset is compulsorily acquired by an Australian government agency: | Detailed Reasoning - Section 124-75 of the ITAA 1997: Requirements if you receive money: Section 124-75(1) states: If you receive money for the event happening, you can choose to obtain a rollover only if these other requirements are satisfied . (emphasis added) Subsection 124-75(2)(a) outlines that you are required to obtain a replacement asset that is a CGT asset which is not a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328. Under subsection 124-75(3) you must incur expenditure in acquiring another CGT asset no earlier than one year before the disposal happens and no later than one year after the end of the income year in which the disposal happens, or within such further time as the Commissioner allows in special circumstances. Subsection 124-75(4) provides that if your original asset was used, installed for use, or in the process of being installed for use in your business then the replacement asset that you acquire must be used or installed for use in your business for a reasonable time after you acquire it. If it is not an asset used in business then you must use the replacement asset for the same or similar purpose to the purpose that you used the original asset. Taxation Determination TD 2000/42 outlines the scope of the words use another asset for the same purpose or for a similar purpose in relation to the replacement asset. Paragraph 2 of TD 2000/42 states that whether the replacement asset is used for the same or a similar purpose is a question of fact and degree. | Detailed Reasoning - Application to your circumstances: Your original asset was a piece of land that was used as farming land. You received money from the State Department of Transport when they compulsorily acquired your original asset. A CGT event occurred when the State Department of Transport compulsorily acquired your land on dd/mm/yyyy. To access the rollover available for compulsorily acquired assets you must satisfy the provisions of section 124-75. Subsection 124-75(4) requires that the asset that you acquire to replace your original asset must, therefore, be used for the same or similar purpose as the original asset. Whether this is the case is a question of fact and degree. As the CGT event in relation to your original asset occurred in mm/yyyy, subsection 124-75(3) dictates that you would be required to have made the choice to obtain a rollover by 30 June 20YY or within such time as the Commissioner allows in special circumstances. You have previously been granted an extension to 30 June 2015 | Detailed Reasoning - Special circumstances for an extension of time: Subsection 124-75(3) provides the Commissioner with the discretion to provide you with further time to incur expenditure in acquiring a replacement asset, in special circumstances. 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. Taxation Determination TD 2000/40 provides guidelines for interpreting subsection 124-75(3) of the ITAA 1997, in particular what are special circumstances. 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. Additionally, example 3 in TD 2000/40 states: Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time. The facts that you have provided state that you were delayed in acquiring a replacement asset because of your extended litigation with the State authority. You received the final amount of compensation in 20ZZ. These are considered reasonable reasons to provide you with an extension of time and it would be fair and equitable in the circumstances to provide such an extension until 30 June 2016. The Commissioner will not experience any significant prejudice by allowing you an extension period to purchase a replacement asset. Other people in similar positions to you would be able to apply for similar extensions and will, therefore, not be unsettled. There do not appear to be any elements of mischief involved and the consequences of not allowing you the extension are significant, as you will be required to amend your return to include the CGT event and the gain that you made at the time of compulsory acquisition. As such, the Commissioner will allow you further time, until 30 June 2016, to acquire a replacement asset that complies with the requirements of section 124-75.