Private ruling: Replacement asset rollover
Date of advice: 8 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: Is a replacement asset rollover available under section 124-70 of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of your property to an Australian government agency? | A1: Yes | Q2: Will you get a capital gains tax exemption when you sell the replacement asset? | A2: Yes

Relevant facts and circumstances: You purchased a piece of land before 20 September 1985. An Australian Government Agency purchased the vacant rear portion of the Lot through negotiated purchase. The land would have been compulsorily acquired if negotiation had not been successful. Within 12 months of the end of the financial year you purchased another lot. The purchase price of the new lot was within 120% of the market value of the original asset. You use the new asset for the same or similar purpose as the original asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 s ection 124-75 | Income Tax Assessment Act 1997 section 124-85

Reasons for decision: Summary: A capital gain or capital loss is made as a result of a capital gains tax (CGT) event happening to a CGT asset (section 102-20 of the ITAA 1997). The most common event is CGT event A1. CGT event A1 happens when you dispose of an asset to someone else, for example you sell your dwelling. The disposal of your rental property constitutes CGT event A1 (section 104-10 of the ITAA 1997). You make a capital gain if your capital proceeds from the disposal are more than the asset’s cost base. You make a capital loss if your capital proceeds are less than the asset’s reduced cost base. A replacement asset rollover is available if an involuntary disposal happens because an asset owned by a taxpayer is compulsorily acquired by an Australian government agency (section 124-70 of the ITAA 1997). 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. Paragraph 124-70(1)(c) of the ITAA 1997 provides that a rollover is also available for an asset where: (c) you dispose of it to an Australian government agency after a notice was served on you by or on behalf of the agency: (i) the disposal takes place after a notice was served on you by or on behalf of the entity; (ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement; (iii) the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity; (iv) the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under subsection (1A); On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received in respect of the compulsory acquisition of the asset. One of these requirements is that the owner of the asset must incur expenditure in acquiring another CGT asset (subsection 124-75(2) of the ITAA 1997). The asset purchased to replace the original asset must be purchased no earlier than one year before the event happens or, within one year after the end of the income year in which the event happens (subsection 124-75(3) of the ITAA 1997) and must be used for the same purpose as the original asset (subsection 124-75(4) of the ITAA 1997). Paragraph 124-85(3)(a) of the ITAA 1997 states that if you acquired the original asset before 20 September 1985 and you incurred expenditure in acquiring another CGT asset, you are taken to have acquired the other asset before that day if the expenditure is not more than 120% of the market value of the original asset when the event happened. This means you disregard any capital gain or capital loss you make when a later CGT event happens to the replacement asset In your case, your property, which was acquired before 20 September 1985, was sold to an Australian Government Agency by negotiation. The agency advised that if you did not negotiate a sale they would proceed with compulsory acquisition. You received money for the sale of the property. You purchased another property within one year after the end of the income year in which the disposal occurred and you are using it for a same or similar purpose to the original asset. The market value of the replacement asset was not more than 120% of the original asset. Consequently, you are entitled to the replacement asset rollover under section 124-70 of the ITAA 1997.