Private ruling: CGT - replacement-asset roll-over
Date of advice: 8 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the demolition costs you have incurred satisfy the replacement-asset roll-over conditions contained in subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the Commissioner grant you an extension of time to incur some of the capital expenditure for the purposes of the replacement-asset roll-over conditions contained in subdivision 124-B of the ITAA 1997? | A2: No. | Q3: Will the roll-over relief still be available if the land is subdivided and a rental property is built on one of the blocks? | A3: Yes.

Relevant facts and circumstances: You own a rental property. The property was purchased after 20 September 1985. The property was damaged due to fire and you received an insurance payout to rebuild the dwelling. You have incurred demolition costs to demolish the damaged property. These costs were not covered by your insurance. To date you have not incurred any expenditure of a capital nature in acquiring, repairing or restoring the replacement asset. You anticipate the cost to rebuild the property would be more than the insurance payout received. You are considering subdividing the land into two blocks. You will build two properties on these blocks, keeping one as a rental property and selling the other.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 124-75 and | Income Tax Assessment Act 1997 Section 43-70.

Reasons for decision: Summary: Replacement-asset roll-over Subdivision 124-B of the ITAA 1997 provides you with the opportunity to choose rollover relief where a CGT asset you own, or part of it, is lost or destroyed. Section 124-75 of the ITAA 1997 allows you to choose to obtain a roll-over if you receive money for the event occurring and you satisfy the following requirements. You must incur expenditure (a) acquiring a replacement asset, or (b) if only part of the asset is lost or destroyed, you incur expenditure of a capital nature repairing or restoring it. To qualify for the roll-over at least some of the expenditure must be incurred: (a) no earlier than one year before the event happens; or (b) no later than one year after the end of the income year in which the event happens; (c) or within such further time as the Commissioner allows in special circumstances. If you receive money as a result of the compulsory acquisition, you can only choose a roll-over if you incur expenditure in acquiring another CGT asset. Under subsection 124-75(3), you must incur at least some of the expenditure 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. In your case, a fire destroyed your rental property. The house that was destroyed, and subsequently demolished, is considered an entirety, therefore to qualify for the roll-over relief you must incur at least some of the expenditure in acquiring a replacement asset, or in your case, rebuilding, within the required time frame. Demolition expenditure Construction expenditure is defined in section 43-70 of the ITAA 1997. Paragraph 43-70(2)(b) of the ITAA 1997 specifically states that construction expenditure does not include expenditure incurred on demolishing existing structures. Therefore, the expenditure you have incurred demolishing the destroyed property would not qualify as eligible capital expenditure for the purposes of the roll-over, as you are not rebuilding the asset at this point, but preparing the land ready for rebuilding. Extension of time Subsection 124-75(3) requires you to incur expenditure in acquiring a replacement CGT asset within a defined period of time, or within such further time as the Commissioner allows in special circumstances. Taxation Determination TD 2000/40 considers that what are 'special circumstances' will depend on the facts of each particular case. In your case, the CGT event occurred when you received the insurance payout. You have until 30 June 2016 to incur capital expenditure in acquiring a replacement asset. The Commissioner would not be willing to grant an extension of time in this case, the time frame that you have to incur capital expenditure has not yet lapsed. There is ample time yet for you to incur at least some of the expenditure in acquiring the replacement asset. Land subdivision Subsection 124-75(4) of the ITAA 1997 states that you must use the replacement asset (for a reasonable time after you acquired it) for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event happened. In your case you are considering subdividing the land and building two properties, one will be sold and the other will held as a rental property. As you will be holding one of the properties as a rental property, you will satisfy subsection 124-75(4) in relation to the same or similar purpose. However, to satisfy subsection 124-75(3), you must incur expenditure in acquiring the replacement asset. Therefore, you must incur at least some of the expenditure in acquiring the replacement asset, that is, rebuilding the rental property and not subdividing the land, before 30 June 2016 to be able to qualify for the replacement-asset roll-over conditions contained in subdivision 124-B of the ITAA 1997.