Private ruling: Exercise of the Commissioner's discretion
Published: December 2014

Ruling: Q1: Will the Commissioner exercise his discretion pursuant to subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow a period greater than 12 months after the end of the income year in which the event happens to acquire a replacement asset? | A1: Yes | Q2: Subject to a positive response to Question 1, will the Commissioner allow an extension of time of a further year and a half, or if that is not acceptable, a further year or, if that is not acceptable, a further 6 months? | A2: Yes, the Commissioner will allow a further 6 month extension of time to incur some of the expenditure on the outstanding replacement asset.

Relevant facts and circumstances: 1. The ABC Trust owned a pre-CGT commercial building. This building was leased by the Trust to tenants who operated commercial ventures from the building. 2. A fire destroyed the building. 3. On the same day that the fire occurred, an insurance claim was lodged. 4. Approximately 6 months later, the Trustee of the ABC Trust resolved that it would reinstate the building through the acquisition of an existing building or buildings. 5. The Loss Adjuster representing the insurance company required the Trust to engage a Quantity Surveyor to estimate the cost of replacing the destroyed building with a similar building. As a result, the ABC Trust's Quantity Surveyor estimated that it would cost $X million to replace the building. 6. The Loss Adjuster representing the insurance company also engaged its own Quantity Surveyor who provided a cost estimate of $Y million for the replacement of the building. 7. A year and half after the date of the fire, the insurance company paid the ABC Trust the indemnity value of $Z for the property. This payment was made without any solicitation from the Trust. Based on advice received by the Trust, these funds were held informally in trust for the insurance company as the Trust did not want the payment of the funds to be interpreted by the insurance company as a surrendering of its rights for reinstatement. 8. While waiting for the insurance company to determine the reinstatement value, the ABC Trust considered purchasing a replacement building from its own resources. However, as there was uncertainty surrounding the outcome of the insurance claim, in particular with regards to the reinstatement value, the Trust determined that the commercially viable properties were outside its own financial resources. As a result, the Trust did not pursue the option of purchasing a replacement building from its own funds. 9. The ABC Trust responded to all of the insurance company's requests within a reasonable timeframe. 10. Some Y months after the insurance claim was originally made by the ABC Trust, the insurance company determined a reinstatement value of $Y million for the building destroyed by fire. Payment of the funds is contingent on the following: a. the ABC Trust providing a copy of the Commercial Property Sales Contract to the insurance company b. the engagement of valuers to determine the value of the land component of the purchase, as the amount to be provided by the insurance company is compensation for the building component only c. the insurance company accepting the value of the land component of the purchase, and d. that the insurance company is provided with evidence demonstrating that settlement on the property occurred. 11. Since the insurance company advised that the reinstatement value had been determined, the ABC Trust has actively pursued purchasing commercially viable replacement buildings. To this end the Trust: a. has made offers on three buildings that were not accepted by the vendors, and b. has purchased three properties. 12. Based on the valuations of the above three properties, the ABC Trust will have a further $V available to it for full reinstatement of the property destroyed by fire. 13. The ABC Trust is currently pursuing purchasing other commercial properties and anticipates that it will need to supplement the reinstatement proceeds to fully fund the purchase of a further property. Given the remaining funds from the insurance proceeds and lending restrictions, finding a suitable property that is commercially viable is limited. 14. The ABC Trust lodged a private binding ruling request seeking the Commissioner to exercise his discretion pursuant to subsection 124-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow a 15 month extension of time. 15. The Commissioner issued a private binding ruling in which he exercised his discretion to allow the ABC Trust a 15 month extension of time to acquire a replacement asset (or assets). 16. Approximately a month prior to the expiration of the 15 month extension already granted by the Commissioner, the ABC Trust lodged a second private binding ruling request seeking the Commissioner's discretion pursuant to subsection 124-75(3) of the ITAA 1997 to allow a further extension of time for the Trust to incur expenditure on replacement assets of either: a. a year and a half b. a year, or c. 6 months. 17. The ABC Trust stated the following in support of its request for an extension of time: a. it is actively pursuing purchasing commercially viable properties to fully replace the CGT asset destroyed by fire b. given the amount of remaining funds available from the insurance proceeds, together with limitations from lenders, suitable properties that are commercially viable c. it has engaged a commercial real estate agent to source and negotiate properties that are not currently on the open market in order to assist with the possibility of purchasing the replacement asset/s d. other commercial property buyers are taking between 12 months to 2 years to find and purchase commercial properties e. it has entered into negotiations to purchase another property. These negotiations however have been protracted and a contract has not been executed by the extended timeframe f. it has erred in requesting a 15 month extension of time for all of the expenditure to be incurred g. it should be allowed 15 months from the time that the insurance funds became certain for some, but not all, of the expenditure to incurred. The remaining expenditure should be allowed to be incurred sometime after the expiration of the 15 month period h. it has incurred $X million of the $Y million insurance proceeds within the extended timeframe already provided by the Commissioner in original private binding ruling i. the proposed extension of time is fair and equitable j. if the Commissioner granted the extension of time, the period requested will not prejudice the Commissioner nor unsettle people or established practices, and k. there is no mischief involved and an extension would be considered fair to people in similar positions and the wider public.

Relevant legislative provisions: Section 124-70 of the Income Tax Assessment Act 1997 | Section 124-75 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Will the Commissioner exercise his discretion pursuant to subsection 124-75(3) of the ITAA 1997 to allow a period greater than 12 months after the end of the income year in which the event happens to acquire a replacement asset? | Detailed Reasoning - REPLACEMENT ASSET ROLL-OVERS: 18. In certain circumstances, if a taxpayer ceases to hold a capital gains tax (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 of the ITAA 1997. This is known as a replacement asset roll-over. 19. The roll-over provisions relating to CGT assets that have been compulsorily acquired, lost or destroyed are in Subdivision 124-B of the ITAA 1997. In relation to a CGT asset that has been destroyed, paragraph 124-70(1)(b) provides that a taxpayer may be able to choose a roll-over. 20. With regards to an insurance policy against the risk of loss or destruction of the original CGT asset, section 124-70(2) of the ITAA 1997 provides that either money or another CGT asset, or both, must be received. 21. Where a taxpayer has received money as a result of the loss or destruction of the CGT asset, subsection 124-75(1) of the ITAA 1997 provides that the requirements in subsections124-75(2) to (6) must also be met in order for a taxpayer to choose to obtain roll-over relief. 22. Subsection 124-75(2) of the ITAA 1997 provides that: a. expenditure must be incurred in acquiring another CGT asset, and b. expenditure of a capital nature must be incurred if part of the original asset is lost or destroyed. 23. Subsection 124-75(3) of the ITAA 1997 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. 24. Taxation Determination TD 2000/41 Income Tax: capital gains: are the two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 for a CGT asset acquired to replace an original asset alternative and mutually exclusive requirements? states at paragraph 13 that there is no limitation on the number of assets that can be treated as replacement assets for an original CGT asset, provided that all the assets each satisfy the requirements of Subdivision 124-B of the ITAA 1997. Therefore, in order to satisfy subsection 124-75(3), at least some of expenditure must be incurred on each of the replacement assets within the specified timeframes. Application to your circumstances 25. The ABC Trust owned a pre-CGT commercial building which was destroyed by fire. Approximately 6 months after the fire, the Trustee of the ABC Trust resolved that it would reinstate the destroyed building through the acquisition of an existing building, or buildings. 26. Pursuant to subsections 124-75(2) and (3) of the ITAA 1997, for the ABC Trust to be eligible to choose CGT rollover relief for the acquisition of an existing building, unless additional time is provided by the Commissioner due to special circumstances, it must incur expenditure within one year after the end of the income year in which the fire occurred. 27. As explained by TD 2000/41, the number of replacement assets the ABC Trust can purchase is not limited as long as the other criteria in Subdivision 127-B of the ITAA 1997 are met. That is, the Trust can purchase more than one property to replace that destroyed by fire however, the timeframes specified in subsection 124-75(3) must be met for each property. This means that the ABC Trust must incur at least some expenditure on each property by no earlier than one year before the event occurred or no later than one year after the end of the income year in which the event occurred. 28. The ABC Trust lodged an insurance claim on the day on which fire destroyed the building. However, by 30 June of the year after the fire occurred, agreement with the insurance company regarding the reinstatement value of the destroyed building had not been reached. Therefore, no replacement assets had been purchased by the Trust in the timeframe required by subsection 124-75(3) of the ITAA 1997. The ABC Trust is therefore ineligible to access the CGT replacement asset rollover relief unless the Commissioner allows additional time due to special circumstances, pursuant to paragraph 124-75(3)(b). 29. The Commissioner provided a private binding ruling to the ABC Trust. In this ruling, the Commissioner exercised his discretion pursuant to section 124-75(3) of the ITAA 1997 to allow an extension of 15 months for the Trust to acquire a replacement asset (or assets). Consistent with this, and paragraph 13 of TD 2000/41, the Trust has purchased three replacement assets within the extended timeframe provided by the Commissioner and may choose rollover relief. Therefore, the ABC Trust is eligible to access the CGT replacement asset rollover relief for the three properties it has purchased within the 15 month extension period. 30. Despite the purchase of the three properties, there remains an outstanding $X from the insurance proceeds from the building destroyed by fire. As none of this amount has been expended for the purchase of a replacement asset, the ABC Trust is unable to access the replacement asset rollover relief in relation to it unless the Commissioner allows additional time due to special circumstances, pursuant to paragraph 124-75(3) of the ITAA 1997. | Detailed Reasoning - What is meant by the term 'special circumstances'?: 31. As explained by 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. 32. 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 by a State authority. The compensation was not received by Amanda and John until one month before subsection 124-75(3) of the ITAA 1997 required them to replace the shop and therefore, they are not able to acquire replacement assets 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. 33. 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) of the ITAA 1997. Application to your circumstances 34. After lodging its insurance claim, the ABC Trust was required to engage a Quality Surveyor to estimate the replacement cost for the destroyed building. The Trust's Quality Surveyor estimated that it would cost approximately $X million to replace the building. 35. The Quality Surveyor engaged by the insurance company estimated a lower replacement cost of approximately $Y million. 36. An unsolicited indemnity payment of $Z for the property was paid by the insurance company to the ABC Trust a month and a half after the Trust was required to have incurred capital expenditure for the replacement asset in order to gain access to the replacement asset rollover relief. Despite receipt of these funds, the ABC Trust did not want the payment to be interpreted by the insurance company as a surrendering of its rights for reinstatement. Consequently, the ABC Trust held the indemnity payment informally on trust for the insurance company. 37. It was not until two and a half months after the ABC Trust was required to have incurred capital expenditure for the replacement asset in order to gain access to the replacement asset rollover relief that the reconciliation process between the two estimates was complete. A reinstatement value of $V million was accepted by the insurance company. 38. The delay in reaching agreement for the reinstatement value was not due to actions of the ABC Trust. The Trust made a number of concessions (totalling approximately $X) and responded to all of the insurance company's requests within a timely manner. 39. While waiting for the insurance company to determine the reinstatement value, the ABC Trust considered purchasing a replacement building from its own resources. However, as there was uncertainty surrounding the outcome of the insurance claim, in particular with regards to the reinstatement value, the Trust determined that the commercially viable properties were outside its own financial resources. As a result, the Trust did not pursue the option of purchasing a replacement building from its own funds. 40. The ABC Trust has demonstrated that it commenced pursuing the purchase of replacement buildings by no later than three months after the reinstatement value was agreed to. 41. The ABC Trust has since purchased X properties. 42. The Commissioner considers that the circumstances of the ABC Trust are consistent to those examples of special circumstances provided by TD 2000/40. Similar to the facts of example 1, in which the taxpayer did not receive compensation until one month before subsection 124-75(3) of the ITAA 1997 required them to purchase a replacement asset, the ABC Trust did not obtain certainty as to the reinstatement value until two and a half months after the timeframe required by the subsection. In example 1, the Commissioner accepted that special circumstances existed to warrant an extension of time. 43. The Commissioner also considers that the ABC Trust's circumstances are consistent with those explained in example 3 of TD 2000/40. In this example, the taxpayer was in protracted dispute with the State Authority with regards to the value of the compensation amount for an asset that has been compulsorily acquired and the Commissioner concluded that special circumstances exist. Similarly, the ABC Trust has been in protracted negotiations with the insurance company regarding the reinstatement value of the building destroyed. 44. The Commissioner therefore accepts that the delay in obtaining agreement to the reinstatement value constitutes special circumstances in the ABC Trust's situation and will allow an extension of time pursuant to subsection 124-75(3) of the ITAA 1997. | Detailed Reasoning - Question 2: Subject to a positive response to Question 1, will the Commissioner allow an extension of time of a further year and a half, or if that is not acceptable, a further year or, if that is not acceptable, a further 6 months? | Detailed Reasoning - Extension of time due to special circumstances: 45. As mentioned earlier, subsection 124-75(3) of the ITAA 1997 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. 46. 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. | Detailed Reasoning - Special rules if another asset is acquired: 47. As previously explained, paragraph 13 of TD 2000/41 states that there is no limitation on the number of assets that can be treated as replacement assets for an original CGT asset, provided that all the assets each satisfy the requirements of Subdivision 124-B of the ITAA 1997. Therefore, in order to satisfy subsection 124-75(3), at least some of expenditure must be incurred on each of the replacement assets within the specified timeframes. 48. Subsection 124-75(4) of the ITAA 1997 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. 49. Subsection 124-75(5) and (6) of the ITAA 1997 provide that the other asset cannot : a. become an item of trading stock after it's been acquired b. be a depreciating asset, or c. become a registered emissions unit after it's been acquired. Application to your circumstances 50. Although the legislation and TD 2000/40 do not provide guidance with regards to the length of additional time the Commissioner allows pursuant to paragraph 124-75(3)(b) of the ITAA 1997, he considers that the ABC Trust's request for an extension of a further 6 months would be acceptable. This is based on the following considerations: a. as the Trust submitted an insurance claim on the day on which the building was destroyed by fire, it took timely action to commence the process of acquisition of replacement asset/s b. there is no evidence to demonstrate that the delay in reaching agreement to the reinstatement value was caused by the actions of the Trust i. in contrast, the Trust responded to all of the insurance company's requests within a timely manner c. the Trust considered purchasing replacement buildings from its own resources but it did not have sufficient funds in advance of the insurance proceeds to do so d. the Trust commenced researching commercially viable replacement buildings by no later than 2 months after the reinstatement value had been agreed by the insurance company e. given the state of the commercial real estate market in its local region, the ABC Trust has had to purchase more than one building to replace that destroyed by fire. This has complicated and delayed the process i. however, there is no legislative requirement that the ABC Trust purchase the replacement commercial buildings solely from the same region as that to the property destroyed by fire. Broadly, all that is necessary to satisfy subsection 124-75(4) to (6) of the ITAA 1997 is that the replacement asset: A. must be used for the same and similar purpose as that of the original asset, and B. cannot become an item of trading stock, be a depreciating asset or become a registered emissions unit. ii. in order to meet the extension of time already provided by the Commissioner, the ABC Trust had the option to pursue the purchase of a commercial property in another location with better market conditions. f. the Commissioner allowed a 15 month extension of time from the date the reinstatement value was agreed to providing that the replacement assets meets the other requirements in subsections 124-75(4) and (5) of the ITAA 1997 g. the ABC Trust has incurred $X million of the $Y million from the insurance proceeds within the extended timeframe provided by the Commissioner h. despite the extension already provided by the Commissioner, the Trust still needs to incur expenditure on another commercial property in order to gain access to the rollover provisions for the full amount of the insurance proceeds i. the ABC Trust has entered into negotiations for the purchase of another property however these negotiations have been protracted and agreement has not been reached by the extended timeframe j. the ABC Trust claims that other commercial property buyers are taking between 12 months to 2 years to find and purchase commercial properties within the same region k. however, the ABC Trust has successfully purchased three commercial properties within 11 months of the reinstatement figure being agreed to by the insurance company. This demonstrates that the Trust has been able to locate suitable properties in a much shorter timeframe than that claimed necessary by other commercial buyers, and l. a further extension of time of a year and a half, or a year, is considered excessive given that: i. the ABC Trust has already purchased X properties within an 11 month period ii. the Trust is in negotiations to purchase another, and iii. there is no requirement for the Trust to purchase the replacement assets solely from the same region as the property destroyed by fire. 51. Given the above factors, the Commissioner considers it reasonable that the Trust will be able to incur some expenditure on the final replacement asset within a further six months. That is, pursuant so subsection 127-75(3) of the ITAA 1997, the Commissioner will allow a further 6 month extension of time based on the ABC Trust satisfying the other requirements of subsections 124-75(4) and (5) of the ITAA 1997.