Private ruling: CGT roll-over under Subdivision 124-B
Date of advice: 8 February 2018
Published: June 2018
Ruling period: 1 July 2016 to 30 June 2017.
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Taxpayer be entitled to choose obtain a roll-over pursuant to Subdivision 124-B of the Income Tax Assessment Act (ITAA 1997) if it incurs expenditure in acquiring a new leasehold interest in land before 30 June 2018? | A1: Yes. | Q2: Will the Taxpayer be entitled to choose to obtain a roll-over pursuant to Subdivision 124-B of the ITAA 1997 if it incurs expenditure in acquiring a bonded leasehold interest in land before 30 June 2018? | A2: Yes, to the extent that the expenditure incurred under a bonded lease is not incurred on assets to which Division 40 or Division 328 apply. | Q3: Will the Taxpayer be entitled to choose to obtain a roll-over pursuant to Subdivision 124-B of the ITAA 1997 if it incurs expenditure in acquiring a freehold interest in land that is already being used to conduct a licenced hotel business before 30 June 2018? | A3: Yes. | Q4: Will the Taxpayer be entitled to choose to obtain a roll-over pursuant to Subdivision 124-B of the ITAA 1997 if it incurs expenditure in acquiring a freehold interest in land that is not already being used to conduct a licenced hotel business before 30 June 2018? | A6: Yes, to the extent that the Taxpayer incurs the ABC Costs. | Q5: Will the Taxpayer be entitled to choose to obtain a roll-over pursuant to Subdivision 124-B of the ITAA 1997 if it incurs expenditure in acquiring more than one of the New Assets before 30 June 2018? | A7: Yes. | Q6: Will the answer to Questions 1 to 6 be different if any of the New Assets are: (a) in the same local government area (b) in the wider metropolitan area; or (c) anywhere in Australia? | A8: No.

Relevant facts and circumstances: Company X (the Taxpayer) is the trustee for the X Unit Trust. The Taxpayer held an interest in a lease (Original Asset) over part of some land. An Australian government agency compulsorily acquired the Taxpayer‘s Original Asset in the year ended 30 June 2017. The Taxpayer received monetary compensation for the compulsory acquisition. At the date of the compulsory acquisition, the Taxpayer had not yet commenced business trading. At the date of the compulsory acquisition, the Original Asset was being used for the purpose of securing and providing premises or accommodation from which a licenced hotel business would be carried on. The Taxpayer had taken the following steps to achieve that objective: ● commissioned and obtained various plans for fit-outs to be installed in the premises; and ● held the statutory licences required to operate the licenced hotel business. Before 30 June 2018, the Taxpayer intends to incur expenditure to acquire another CGT asset, being any one or more of the following New Assets: ● a new leasehold interest, being a new leasehold interest in land where the land in which the interest is to be acquired is to be used to conduct a licenced hotel business or similar business. ● a bonded leasehold interest, where the lessee will be required to incur expenditure in respect of the leased property. Some of this expenditure may be incurred on assets that fall under the definition of ‘depreciating assets’ under Division 40 of the ITAA 1997. The bonded leasehold interest will be in regards to land being used to conduct a licenced hotel business, being either: ● a bonded lease over the ABC Land, which is owned by a related entity of the Taxpayer; or ● a bonded lease over some other land owned by a third party on which a licenced hotel business is being conducted. ● a freehold interest in land that is already being used to conduct a licenced hotel business. ● a freehold interest in land that is not already being used to conduct a licenced hotel business. ● capital works, being works solely to which Division 43 of the ITAA 1997 applies, such as the following works to be conducted on premises leased, or to be leased, by the Taxpayer to conduct a licenced hotel business: ● the building, extension, alteration or improvement to a building ● structural improvements, or extensions, alterations or improvements to structural improvements on land of which premises are leased, or to be leased by the Taxpayer, being used, or to be used, to conduct a licenced hotel business ● this also includes capital works on the ABC Land With respect to the capital works, the expenditure may be incurred in one of the following ways: ● as a term of a bonded lease; or ● as a pre-condition to entering a lease, for example, under an agreement for lease. In this scenario, it is anticipated that the agreement for lease would provide for the grant of lease upon satisfaction of any conditions precedent. With respect to ABC Land, over which the Taxpayer may acquire a bonded leasehold interest, the local council issued a Notice of Determination for its development (ABC Development Application Approval). The ABC Costs are costs incurred by the owner of the ABC Land or another entity in obtaining the ABC Development Application Approval. If the Taxpayer enters into a lease in respect of the ABC Land, the Taxpayer will be required to either pay for the ABC Costs or reimburse the landowner of the ABC Land for the ABC Costs.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 43-15(1) | Income Tax Assessment Act 1997 subsection 43-70(1) | Income Tax Assessment Act 1997 subsection 43-70(1) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 subsection 124-70(1) | Income Tax Assessment Act 1997 paragraph 124-70(2)(a) | Income Tax Assessment Act 1997 subsection 124-75(1) | Income Tax Assessment Act 1997 subsection 124-75(2)(a) | Income Tax Assessment Act 1997 paragraph 124-75(3)(b) | Income Tax Assessment Act 1997 subsection 124-75(4) | Income Tax Assessment Act 1997 subsection 124-75(5) | Income Tax Assessment Act 1997 subsection 124-75(6)

Reasons for decision: Summary: Pursuant to Subdivision 124-B, the Taxpayer will be entitled to choose a capital gain roll-over if it incurs expenditure in acquiring a new leasehold interest in land before 30 June 2018. | Detailed Reasoning - Detailed reasoning: Subdivision 124-B details the relevant provisions by which entities are entitled to capital gain roll-overs after the compulsory acquisition of their CGT assets. Section 124-70 provides that a taxpayer may be able to choose a roll-over if a CGT asset is compulsorily acquired by an Australian government agency (the Event) and the compensation for the Event is money or another CGT asset or both. As the Original Asset owned by the Taxpayer was compulsorily acquired by an Australian government agency and the Taxpayer received monetary compensation, the requirements in section 124-70 are met. Subsection 124-75(1) requires further conditions to be satisfied if money is received for the Event happening. Subsection 124-75(2) provides that you must incur expenditure in acquiring another CGT asset, except a depreciating asset whose decline is worked out under Division 40 or deductions for which are calculated under Division 328. The first requirement of this subsection is the acquisition of another CGT asset. As defined under section 108-5: (1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. (2) To avoid doubt, these are CGT assets : (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). A lease is a legal right over real property and satisfies paragraph 108-5(2)(a). As such, a new leasehold interest in land meets the definition of a CGT asset. The second requirement is that the CGT asset not be a depreciating asset to which Division 40 and Division 328 apply. A leasehold interest is not a depreciating asset that will be depreciated under Division 40 or Division 328 and the Taxpayer does not trade in leases so a leasehold interest is not trading stock. Accordingly, a new leasehold interest in land satisfies the requirements of subsection 124-75(2). Subsection 124-75(3) states: At least some of the expenditure must be incurred: (a) no earlier than one year, or within such further time as the Commissioner allows within special circumstances, before the event happens; or (b) no later than one year, or within such further time as the Commissioner allows within special circumstances, after the end of the income year in which the event happens Taxation Determination TD 2000/39 Income tax: capital gains: what does the word 'incur' in subsection 124-75(2) of the Income Tax Assessment Act 1997 mean? (TD 2000/39) defines the word ‘incur’ for the purposes of subsection 124-75(2) in relation to expenditure in acquiring a CGT asset, to mean that you: (a) outlay expenditure; or (b) have definitively committed yourself, or have completely subjected yourself, to a presently existing liability to outlay the expenditure. Where the Taxpayer incurs expenditure in acquiring a new leasehold interest before 30 June 2018, this requirement will be satisfied. Subsection 124-75(4) 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. 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 even happened. (Items marked with an asterisk (*) are defined in the dictionary at section 995-1 of the ITAA 1997). 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? (TD 2000/41) provides that either of the two requirements in subsection 124-75(4) can be satisfied. The Taxpayer was in the process of preparing the leased premises for business activity, but had not yet commenced business trading at the time of the compulsory acquisition. Accordingly, the Taxpayer does not satisfy the first requirement. However, where the Taxpayer uses the newly acquired asset for the same or similar purpose for which they used the Original Asset within a reasonable time after it is acquired, it will satisfy the second requirement in subsection 124-75(4). Where the proposed acquisition of a new leasehold interest is used for the purpose of securing or providing premises or accommodation from which a licenced hotel business would be carried on, this will satisfy the second requirement in subsection 124-75(4). The same or similar purpose test will also be satisfied if the premises is used to conduct another business. This is illustrated in Example 1 of TD 2000/41 where the replacement CGT asset is used in a different type of business to the original business. Therefore, based on the information provided, the Taxpayer will be entitled to choose a capital gain roll-over pursuant to Subdivision 124-B if it incurs expenditure in acquiring a new leasehold interest before 30 June 2018. | Summary: Pursuant to Subdivision 124-B, the Taxpayer will be entitled to choose a capital gain roll-over if it incurs expenditure in acquiring a bonded leasehold interest before 30 June 2018, to the extent that expenditure incurred under a bonded lease is not incurred on assets to which Division 40 or Division 328 apply. | Detailed Reasoning - Detailed reasoning: As explained in the detailed reasoning to Question 1 above, Subdivision 124-B contains the relevant provisions by which entities are entitled to choose to obtain a capital gain roll-over after the compulsory acquisition of their CGT assets. The Original Asset owned by the Taxpayer was compulsorily acquired an Australian government agency, and the Taxpayer received monetary compensation. It is proposed that the Taxpayer may acquire a bonded leasehold interest in land to conduct a licenced hotel business. A lease is a legal right over real property and satisfies paragraph 108-5(2)(a). As such, a bonded leasehold interest in land meets the definition of a CGT asset. It was provided that expenditure incurred under a bonded lease may be incurred on assets that fall under the definition of ‘depreciating assets’ under Division 40. To the extent that expenditure incurred under a bonded lease is not incurred on assets to which Division 40 or Division 328 apply, the requirement in subsection 124-75(2) will be satisfied. It is proposed that at least some of the expenditure in acquiring a bonded leasehold interest will be incurred by 30 June 2018. Thus, the requirement in subsection 124-75(3) is met. Where the proposed acquisition of the bonded leasehold interest is used for the purpose of securing or providing premises or accommodation from which a licenced hotel business would be carried on, this will satisfy the second requirement in subsection 124-75(4). Therefore, based on the information provided, the Taxpayer will be entitled to choose a capital gain roll-over pursuant to Subdivision 124-B if it incurs expenditure in acquiring a bonded leasehold interest before 30 June 2018. | Summary: Pursuant to Subdivision 124-B, the Taxpayer will be entitled to choose a capital gain roll-over if it incurs expenditure in acquiring a freehold interest in land that is already being used to conduct a licenced hotel business, before 30 June 2018. | Detailed Reasoning - Detailed reasoning: As explained in the detailed reasoning to Question 1 above, Subdivision 124-B contains the relevant provisions by which entities are entitled to choose to obtain a capital gain roll-over after the compulsory acquisition of their CGT assets. The Original Asset owned by the Taxpayer was compulsorily acquired by an Australian government agency, and the Taxpayer received monetary compensation. It is proposed that the Taxpayer may acquire a freehold interest in land that is already being used to conduct a licenced hotel business. A freehold interest in land is real property and satisfies paragraph 108-5(1)(a). As such, a freehold interest in land meets the definition of a CGT asset. A freehold interest in land is not a depreciating asset that will be depreciated under Division 40 or Division 328 and the Taxpayer does not trade in land so it is not trading stock. Thus, the requirement in subsection 124-75(2) is met. It is proposed that at least some of the expenditure in acquiring the freehold interest in land will be incurred by 30 June 2018. Thus, the requirement in subsection 124-75(3) is met. Where the proposed acquisition of the freehold interest in land is used for the purpose of securing or providing premises or accommodation from which a licenced hotel business would be carried on, this will satisfy the second requirement in subsection 124-75(4). Therefore, based on the information provided, the Taxpayer will be entitled to choose a capital gain roll-over pursuant to Subdivision 124-B if it incurs expenditure in acquiring a freehold interest in land that is already being used to conduct a licenced hotel business, before 30 June 2018. | Summary: Pursuant to Subdivision 124-B, the Taxpayer will be entitled to choose a capital gain roll-over if it incurs expenditure in acquiring a freehold interest in land that is not already being used to conduct a licenced hotel business, before 30 June 2018. | Detailed Reasoning - Detailed reasoning: As explained in the detailed reasoning to Question 1 above, Subdivision 124-B contains the relevant provisions by which entities are entitled to choose to obtain a capital gain roll-over after the compulsory acquisition of their CGT assets. The Original Asset owned by the Taxpayer was compulsorily acquired by an Australian government agency, and the Taxpayer received monetary compensation. It is proposed that the Taxpayer may acquire a freehold interest in land that is not already being used to conduct a licenced hotel business. A freehold interest in land is real property and satisfies paragraph 108-5(1)(a). As such, a freehold interest in land meets the definition of a CGT asset. A freehold interest in land is not a depreciating asset that will be depreciated under Division 40 or Division 328 and the Taxpayer does not trade in land so it is not trading stock. Thus, the requirement in subsection 124-75(2) is met. It is proposed that at least some of the expenditure in acquiring the freehold interest in land will be incurred by 30 June 2018. Thus, the requirement in subsection 124-75(3) is met. Where the proposed acquisition of the freehold interest in land is used by the Taxpayer for the purpose of securing or providing premises or accommodation from which a licenced hotel business would be carried on, this will satisfy the second requirement in subsection 124-75(4). Therefore, based on the information provided, the Taxpayer will be entitled to choose a capital gain roll-over pursuant to Subdivision 124-B if it incurs expenditure in acquiring a freehold interest in land that is not already being used to conduct a licenced hotel business, before 30 June 2018. | Summary: Pursuant to Subdivision 124-B, the Taxpayer is entitled to choose a roll-over if it incurs expenditure in acquiring capital works before 30 June 2018, to the extent that the capital works are owned by the Taxpayer. | Detailed Reasoning - Detailed reasoning: As explained in the reasoning to Question 1 above, Subdivision 124-B details the relevant provisions by which entities are entitled to choose to obtain a capital gain roll-over after the compulsory acquisition of their CGT assets. The Original Asset owned by the Taxpayer was compulsorily acquired by an Australian government agency, and the Taxpayer received monetary compensation. CGT asset Under section 108-5, a CGT asset is defined as any kind of property or part of a property; therefore, leasehold improvements are considered a CGT asset. Whether the Taxpayer is considered to have acquired the capital works on leasehold property and, more specifically, capital works to which Division 43 applies such as extensions, alterations or improvements to buildings or structural improvements, will depend on the ownership of the leasehold improvements. CGT Determination TD 46 Capital Gains: What are the CGT consequences where a lessee affixes to the lessor’s land an asset which continues to be owned by the lessee? provides that a lessee will be treated as continuing to be the owner of an asset which the lessee has affixed to the lessor’s land where: ● the law of the relevant State or Territory provides for the ownership of the asset to remain with the lessee ● the lessee is regarded as being the owner of the asset within the terms of Taxation Ruling IT 175 Depreciation: improvements and fixtures on leasehold property (IT 175). IT 175 provides that whether an object constitutes a fixture, and if so whether it is a fixture removable at the will of the lessee, are questions of fact to be decided in each case in the light of all the surrounding circumstances. Paragraph four of IT 175 mentions a number of factors to consider when ascertaining whether there is a necessary degree of ownership in respect of the fixtures, including: ● the lessee’s right to remove fixtures annexed by him/her, during or at the termination of the lease ● the lessee’s right to receive compensation for the fixtures if the lessee has no right of removal. Where the Taxpayer, and not the landowner, owns the leasehold improvements, the first requirement of paragraph 124-75(2)(a) will be satisfied. Depreciating asset Capital works, such as extensions, alterations or improvements to a building or structural improvements, are deductible under Division 43 and therefore are not a depreciating asset to which Division 40 applies. Same or similar purpose The proposed expenditure on capital works will be improvements to premises used to conduct a licenced hotel business and will satisfy the second requirement in subsection 124-75(4). Therefore, based on the information provided, the Taxpayer will be entitled to choose a capital gain roll-over pursuant to Subdivision 124-B if it incurs expenditure in acquiring capital works before 30 June 2018, subject to the ownership of the capital works by the Taxpayer. | Summary: Where the Taxpayer incurs the ABC Costs, they will be included in the construction expenditure in respect of the capital works on the ABC Land. | Detailed Reasoning - Detailed reasoning: Division 43 sets out the rules for working out the deductions for capital expenditure on capital works. Subsection 43-15(1) states the amount you can deduct is a portion of your construction expenditure. Subsection 43-70(1) defines construction expenditure as capital expenditure incurred in respect of the construction of capital works. Construction expenditure Paragraph 9 of Taxation Ruling TR 97/25 I ncome tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements provides that construction expenditure includes preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits. The ABC Costs include consultant costs such as architect fees and engineering fees to obtain the ABC Development Application Approval. Due to the preliminary nature of the ABC Costs, they would satisfy the definition under subsection 43-70(1). ‘Incur’ The capital expenditure must be ‘incurred’ in respect of the construction of capital works. Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26) considers the meaning of the word ‘incurred’, in the context of the general deduction provision in subsection 8-1(1). It explains that a loss or outgoing has been ‘incurred’ if there is a presently existing liability. To the extent that the Taxpayer actually incurs the ABC Costs, for example, by directly incurring the loss or outgoing or by reimbursing the ABC landowner under a contractual obligation to do so, the ABC Costs will be included in the construction expenditure in respect of the capital works on the ABC Land, provided that the costs do not fall under the list of specific exclusions under subsection 43-70(2). | Summary: The Taxpayer will be entitled to choose to obtain a roll-over pursuant to Subdivision 124-B if it incurs expenditure in acquiring more than one of the New Asset before 30 June 2018. | Detailed Reasoning - Detailed reasoning: Paragraph 13 of TD 2000/41 provides that there is no restriction on the number of CGT assets that may be treated as replacement assets for an original CGT asset in the replacement asset roll-over provisions in Subdivision 124-B, provided that they each satisfy the relevant requirements of Subdivision 124-B. | Summary: The acquisition of a New Asset within the same local government area, the wider metropolitan area or anywhere in Australia, will not affect the answers to questions 1 to 6. | Detailed Reasoning - Detailed reasoning: Taxation Determination TD 2000/ 42 Income tax: capital gains: what is the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4) of the Income Tax Assessment Act 1997 in relation to a replacement asset? (TD 2000/42) provides that whether a CGT asset is used for the same or similar purpose as another asset is a question of fact and degree. Example 3 of TD 2000/42 illustrates an example where a taxpayer’s original asset is a rental house located near the sea, and the replacement asset is a rental unit located in the city. In this example, the acquisition of the city unit falls within the scope of the same or similar purpose test. Consistent with this example, the New Asset does not need to be in the same location as the Original Asset. Therefore, the acquisition of a New Asset within the same local government area, the wider metropolitan area or anywhere in Australia, will satisfy the ‘same or similar purpose test’ such that the answers to questions 1 to 6 will not be any different.

Question 5(a): Will the Taxpayer be entitled to choose to obtain a roll-over pursuant to Subdivision 124-B of the ITAA 1997 if it incurs expenditure on capital works before 30 June 2018? | Yes, to the extent that the capital works are owned by the Taxpayer. | Question 5(b): If the answer to Question 5(a) is yes, will the ABC Costs be included in the construction expenditure in respect of capital works on the ABC Land? | Reasons for decision: All further legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.