Private ruling: Capital gains tax (CGT) asset rollover following compulsory acquisition
Date of advice: 12 September 2017
Published: January 2018
Ruling period: 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you access the capital gains tax (CGT) rollover under section 124-70 of the Income Tax Assessment Act 1997 (ITAA 1997) for any capital gain or loss that you make on the disposal of Property A? | A1: No. | Q2: Does the Reimbursement Amount form part of the capital proceeds from the disposal of Property A; included in determining any capital gain made on the sale of Property A that is eligible for the CGT discount? | A2: No. | Q3: If the answer to Question 2 is no, are you able to deduct from the Reimbursement Amount the stamp duty and legal fees you paid in relation to the purchase of the replacement property and include only the remainder as income? | A3: No. | Q4: Can the Reimbursement Amount be considered a recoupment of the costs incurred when Property A was purchased by you in 20XX? | A4: No.

Relevant facts and circumstances: You purchased Property A in 20XX for use as an investment property on which you incurred legal fees and stamp duty. In 20XX you were made aware that construction would affect Property A through noise, vibration and loss of amenity of the footpath for a period. The President of the Body Corporate of the property contacted the Premier and the department to request some form of compensation. In 20XX you received a letter from the department which stated that they have approval to acquire Property A. The letter also stated that the department would not be exercising its compulsory acquisition powers to acquire Property A. In 20XX you received letter from the department which provided the valuation to acquire the freehold interest in Property A. The letter stated that market value of Property A was $XXXX and that there was a “disturbance breakdown” valued in addition to the market value of $XXXX. In 20XX you entered a contract with the department for the sale of Property A. A clause of the contract provided that the property was not to be acquired under the compulsory acquisition powers. Another clause of the contract provided that a Reimbursement Amount was to be paid. Settlement of Property A also occurred in 20XX. You received the Reimbursement Amount at settlement in satisfaction of the contract. Your contract settled for a replacement property in 20XX and you incurred stamp duty and legal fees of $XXXX on the purchase which you have paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 115-25 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 110-35 | Income Tax Assessment Act 1997 section 110-45

Reasons for decision: Detailed Reasoning - Compulsory acquisition rollover: Section 124-70 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you may be able to choose an asset rollover where a CGT event happens to an asset you own if it is compulsorily acquired by an Australian Government agency. Subclause 51(a) of the contract for sale that you signed states that you acknowledge that the property is not being compulsorily acquired by the department. Further, it also states that you acknowledge that the Act does not apply to the contract. You are not entitled to use the rollover provisions under section 124-70 of the ITAA 1997 for the sale of Property A, as it has not been compulsorily acquired. | Detailed Reasoning - Capital gains tax – capital proceeds: Section 102-5 of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year. Paragraph 108-5(1)(b) of the ITAA 1997 provides that a CGT asset is a legal or equitable right that is not property. Example 1 of section 108-5 of the ITAA 1997 provides that a right to enforce a contractual obligation is an example of a CGT asset. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. Section 115-25 of the ITAA 1997 provides that to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. In your circumstances, a clause of the contract for sale provided that you were to be paid the Reimbursement Amount upon completion of the contract. This created a contractual right and became a separate and distinct CGT asset from Property A. You are taken to have acquired the contractual right on the date of the contract. You received the Reimbursement Amount at settlement and the term of the contract was satisfied, which resulted in CGT event C2 happening. The Reimbursement Amount represents capital proceeds from CGT event C2, as opposed to the capital proceeds from the disposal of Property A (a separate CGT event, CGT event A1). Section 118-20 of the ITAA 1997 allows you to reduce a capital gain if, as a result of the CGT event, another provision of the ITAA 1997 includes an amount in your assessable income. In your case, while you may include the amounts you actually expended on legal fees and stamp duty in the cost base of your replacement asset (as discussed below), the Reimbursement amount is not otherwise included in your assessable income. Accordingly, you cannot reduce the capital gain from CGT event C2 by the amount you paid for legal fees and stamp duty. Additionally, as you did not acquire the contractual right more than 12 months prior to CGT event C2 occurring, any capital gain made from this event will not be a discount capital gain. | Detailed Reasoning - Capital gains tax – cost base: Subsection 110-25(1) of the ITAA 1997 provides that the cost base of a CGT asset contains 5 elements. Subsection 110-25(3) of the ITAA 1997 provides that the second element of the cost base of a CGT asset is the incidental costs you incurred. Remuneration for the services of a legal advisor and stamp duty both meet the definition of incidental costs (subsection 110-35(2) and (4) of the ITAA 1997). You are prevented from including an amount in the cost base of an asset if you have received a recoupment of it, except so far as the amount is included in your assessable income (subsection 110-45(3) of the ITAA 1997). Section 20-25 of the ITAA 1997 provides that a recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing. Cost base – replacement asset In this case, while you have received a recoupment of your legal fees and stamp duty paid to acquire the replacement property, the amount will be included in your assessable income – as capital proceeds from CGT event C2. Accordingly you are able to include your expenditure on legal fees and stamp duty in the second element of the cost base of the replacement property. Cost base – Property A Clause 51 provides that the Reimbursement Amount paid to you under the contract of sale was for the stamp duty and legal fees that may be incurred in purchasing a replacement property or in connection with the sale of Property A. As such, the payment received is not a recoupment of the stamp duty and legal fees paid by you when you initially purchased Property A in 2015.