Private ruling: Capital gains tax roll-over conditions
Published: September 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the use of the other asset in the same business as your original asset (the compulsorily acquired parcel of land), from the date of its acquisition until the date of the proposed merger, constitute a 'reasonable time' for the purposes of continuing to satisfy the first requirement of the replacement asset roll-over conditions under subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The trust is a resident discretionary trust. You (the trust), are the owner of a parcel of land, Property A. Property A was acquired post 20 September 1985. Property A is has been used in a business since its acquisition. A government body expressed an interest to acquire a part of Property A (the parcel). The government body has compulsory acquisition powers and formally exercised it compulsory acquisition powers to acquire the parcel. For capital gains tax (CGT) purposes you treated the parcel as having been disposed to the government body in the 2011-12 financial year. Before being acquired the parcel was an asset of yours used by you in your business. Consistent with this use, you licensed Property A (of which the parcel formed part) to a related entity to carry out business activities on the land. In addition to the Property A, you own another property, being Property B. Property B is also licensed to the related entity to carry out business activities on the land. The related entity owns all the necessary assets required to carry out the business activities on both Property A and B. A core element of your business is to own property and make it available to your related entity to carry out business activities on the land. More recently, you developed a property for residential purposes. Prior to its development the property was used in a business operated by related entities. Within 12 months of the compulsory acquisition of the parcel of land, you acquired a property, being Property C. The acquisition of Property C was divided into two key parts, with you acquiring the property and your related entity acquiring the remainder of the business assets. Similarly to Property A and B, you licensed the Property C to your related entity to carry out its business activities on the land. In your income tax return for the financial year ended 30 June 2012 (the year in which the parcel was disposed), you treated Property C as a replacement asset for the purposes of subdivision 124-B of the ITAA 1997 as: · the parcel was compulsorily acquired by an Australian government agency · you received money as compensation for the CGT event · the trust is not a foreign trust · you incurred expenditure in acquiring Property C, and · the expenditure was incurred within 12 months of 30 June 2012 You state that you were satisfied that, for the purposes of subsection 124-75(4) of the ITAA 1997, the key requirements of subdivision 124-B had been satisfied and you were entitled to the CGT roll-over. For the purposes of subsection 124-75(4) of the ITAA 1997, you self-assessed that you satisfied either the first or second requirement. In terms of the first requirement, you were satisfied that just before its disposal, the parcel was used in your business, and upon and after its acquisition, Property C was used in the same business. If for any reason it failed to satisfy the first requirement of subsection 124-75(4) of the ITAA 1997, you also formed the view that it satisfied the second requirement of that subsection, as Property C (being the relevant other asset) was used for the same purpose as, or a similar purpose to, the purpose for which you used the parcel (the original asset) just before it was disposed. Approximately 9 months after Property C was acquired (and 2 months after the income tax return claiming the roll-over had been lodged), you and your related entity decided to merge your businesses. The merger is to be undertaken for commercial, land tax and family succession reasons. The idea of the merger was first raised as part of legal advice only at the end of the 2012-13 financial year. The merger will be implemented by your related entity doing three key things; 1) transferring all related assets used in their business on Property A to you 2) transferring all related assets used in their business on Property B to you 3) transferring all related assets used in their business on Property C to you As a result of the merger, your business will materially change in nature and materially increase in size. You state that there are no current plans to dispose of Property C.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 Section 124-75

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with roll-over relief in relation to assets that have been compulsory acquired, lost or destroyed. Subsection 124-75(4) of the ITAA 1997 provides that there are special rules for when you acquire another asset (the other asset), with money you have received from the compulsory acquisition of your original asset. It states that: If just before the event happened the original asset: (a) was used in your business; or (b) was installed ready for use in your business; or (c) was in the process of being installed ready for use in your business; the other asset must be used in the business or be installed ready for use in the business for a reasonable time after you acquired it (first requirement). Otherwise, you must use the other 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 (second requirement). The tests set out in subsection 124-75(4) of the ITAA 1997 are alternative tests. This is confirmed by the Commissioner in Taxation Determination TD 2000/41 at paragraph 2, where it states: There are two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997, either of which can be satisfied. Accordingly, if the first requirement of the subsection is satisfied, there is no need to consider the second requirement. Taxation Determination TD 2000/44 discusses what constitutes a 'reasonable time' for the purposes of subsection 124-75(4) of the ITAA 1997. It states, in the note at paragraph 3, that: The 'reasonable time' test in relation to use of a replacement asset after its acquisition may not be satisfied if you continue to own the asset but a change occurs in its nature or use. For example, this could happen if you decide to turn a replacement rental property into your main residence. The period of use of the new asset in the same business or for the same or similar purpose must be of sufficient duration to be regarded as a reasonable time having regard to the entire period of its ownership. | Detailed Reasoning - Application to your circumstances: You state that you are in business. The land was licensed to a related entity to use in its business. An Australian government agency, (which includes a state government body) compulsorily acquired a parcel of land (the original asset) from you in the 2011-12 financial year. Within 12 months, you purchased another parcel of land, Property C (the other asset). From this date, you used Property C in your business. The land was licensed to a related entity to use in its business. As you were satisfied that you met the required conditions for the replacement asset roll-over under subdivision 124-B of the ITAA 1997, you self-assessed that you were entitled to the roll-over and completed and lodged you income tax return for the 2011-12 financial year accordingly. You now propose to enter into a merger with the related entity that farms the primary production land that you hold. You state that the idea of the merger was first considered some 8 months after the acquisition of the replacement asset. As part of the merger you intend that all the farm related assets held by the related entity will be transferred to you and you will begin to farm the land that you own yourself, rather than leasing it to the related party to be farmed. As such, the nature of the replacement asset acquired will change from being land that you leased as the primary activity of your business, to land that you will farm as the primary activity of your business. As you have used the original asset in your business, the other asset must be used in the same business for a reasonable time after you acquired it, or, for the same or for a similar purpose, in a different business for a reasonable time after you acquired it. The duration of a reasonable time must have regard to the entire period of your ownership of the asset. Based on the information provided, the other asset has been used in the same business since its acquisition, and is currently still used in this business. There is no indication, at this stage, when or if the property will be disposed of and therefore your total period of ownership remains undefined. All that can be noted is that for your total period of ownership so far, the property has been used in the same business. It is only after the merger is completed that the acquired property will be used in a different business, that being a business of primary production farming on the land, rather than the current business activity of leasing the land for farming. Further, the land will still be used for farming after the merger and you will still be earning assessable income from the land, it is only the entity that undertakes the farming activity that will change. To state that some future event such as an expansion, contraction or change in the focus of a business of an entity, which is considered a common occurrence in carrying on a business, should necessarily deny the continuing satisfaction of the roll-over conditions when the other asset (immediately after its acquisition) was clearly used in the same business activity for a period of time before this change would appear to defeat the intention of the roll-over relief available under the legislation. Accordingly, while your business will materially change in nature as a result of the proposed merger, it is considered that the use of the other asset in the same business for the period of time since its acquisition, to the intended merger date, constitutes a 'reasonable time' for the purposes of subsection 124-75(4) of the ITAA 1997.