Private ruling: Capital gains tax - destruction - roll-over relief
Published: October 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner exercise his discretion and extend the time for obtaining a replacement asset until the purchase date of the property? | A1: Yes. | Q2: Will the purchase of a property satisfy the conditions of a replacement capital gains tax (CGT) asset? | A2: Yes. | Q3: Are you eligible for the CGT rollover relief under subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the insurance proceeds received for the destroyed dwelling? | A3: Yes. | Q4: For the purposes of calculating the appropriate capital gain to which the rollover relief relates, will the cost base of the destroyed dwelling be calculated in accordance with the apportionment rules in section 112-30 (ITAA 1997)? | A4: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 , Division 40 | Income Tax Assessment Act 1997 , section 103-25 | Income Tax Assessment Act 1997 , section 104-20 | Income Tax Assessment Act 1997 , section 108-50 | Income Tax Assessment Act 1997 , section 112-30 | Income Tax Assessment Act 1997 , subdivision 124-B | Income Tax Assessment Act 1997 , paragraph 124-70(1)(b) | Income Tax Assessment Act 1997 , subsection 124-70(2) | Income Tax Assessment Act 1997 , subsection 124-75(1) | Income Tax Assessment Act 1997 , subsection 124-75(2) | Income Tax Assessment Act 1997 , subsection 124-75(3) | Income Tax Assessment Act 1997 , subsection 124-75(4) | Income Tax Assessment Act 1997 , subsection 124-75(5) | Income Tax Assessment Act 1997 , subsection 124-85(2) | Income Tax Assessment Act 1997 , Division 328

Reasons for decision: Summary: A CGT event C1 happens if a CGT asset you own is lost or destroyed. The timing of the event is when you first receive compensation for the loss or destruction. An insurance payment would constitute compensation. You make a capital gain if the compensation is more than the asset's cost base. In your case a C1 CGT event happened when you received an insurance payment in relation to the destruction of your holiday house. | Detailed Reasoning - Rollover relief: You may choose a rollover if the asset, or part of it, is lost or destroyed and if you receive money, you must received it as compensation, or under an insurance policy. In your case you meet both these requirements. | Detailed Reasoning - Requirements if you receive money: For the rollover to apply you must receive money for the event happening, expenditure must be incurred in relation to a replacement asset, with that expenditure happening no earlier than one year before the event happens or no later than one year after the end of the income year in which the event happens, or within such further time that the Commissioner allows in special circumstances. In your circumstances the Commissioner has granted you an extension of time to acquire the replacement asset as you satisfy the requirements for rollover relief in relation to the destroyed dwelling. | Detailed Reasoning - Land & Buildings: Where a building is built upon land, the building becomes part of the land. Similarly, capital improvements to assets do not normally have a separate legal existence from the asset itself. However, for CGT purposes the building or capital improvement may be treated as a separate asset. Where the aforementioned circumstances do not apply, the legal principle will apply such that any building or other improvement made to the land becomes part of the land and thereafter the composite asset is treated as a single asset under section 108-50 (ITAA 1997). In your case the destroyed dwelling and the land on which it was built will constitute a single asset for CGT purposes. | Detailed Reasoning - Apportionment of cost base: Where there is a partial destruction of a CGT asset, such as a building on land, there is no requirement that the remaining land be disposed of in order that the rollover provisions be accessed in relation to the building. There will, however be cost base implications. | Detailed Reasoning - Cost base of destroyed dwelling: When there is only a partial disposal (or in this case, destruction) of a CGT asset, then the cost base needs to be apportioned between the part that has been destroyed and the part that remains. In order to calculate that portion of the cost base that relates to the part of the asset that was destroyed, the following calculation is used: Cost base of whole asset X Capital proceeds for the CGT event ____ happening to the part____________ Those capital proceeds plus the market value of the remainder of the asset This is the part of your original cost base that relates to the dwelling that was destroyed by the fire. You would use this amount to establish whether you have made a capital gain from the proceeds received from the insurance claim. | Detailed Reasoning - Market valuation of remaining asset (land): In order to determine the cost base for the destroyed dwelling, you must determine the market value of the remaining portion of the original asset (i.e. the land) at the time that the dwelling was destroyed by fire. Where the market value of an asset needs to be determined, you can choose to: (i) obtain a detailed valuation from a qualified valuer; or, (ii) compute your own valuation based on reasonably objective and supportable data. Once the cost base of the destroyed dwelling and land together has been established, the cost base for the destroyed dwelling alone can be determined and the exact amount of the capital gain relating to the destruction of the dwelling can then be calculated. | Detailed Reasoning - Cost base of remaining land: The remainder of the cost base (i.e. the cost base of the whole asset (destroyed dwelling & land) less the cost base of the destroyed dwelling) is the amount attributable to that part of the asset that was not affected by the event, in your case the land. | Detailed Reasoning - Effect on cost base of replacement asset: The way the roll-over applies will depend on whether the money you receive is more or less than the cost of acquiring the replacement asset (subsection 124-85(2) of the ITAA 1997). · Where the money you received exceeds the expenditure you incurred to acquire the replacement asset and the capital gain is more than the difference between the amount you received and the cost of the replacement asset: The capital gain is reduced to the amount of the excess; and The expenditure is reduced by the amount by which the capital gain before it is reduced is more than the excess. · If the money exceeds the expenditure, and the gain is less than or equal to the excess, the gain is not reduced. · If the amount paid to acquire a replacement asset exceeds the money received then the gain is disregarded and the expenditure is reduced by the amount of the gain. | Detailed Reasoning - Sale of remaining land: The subsequent sale of the vacant land is a CGT event A1. You will make a capital gain if your proceeds exceed the cost base of the land as calculated in accordance with the above methodology. You will make a capital loss if the reduced cost base of the land is greater than the proceeds. | Detailed Reasoning - Election: If you choose the replacement-asset rollover in relation to this capital gain, you do not need to lodge a written election stating your choice. The way you prepare your return is indicative of your choice to apply the rollover.

Relevant facts: You purchased a holiday house after 20 September 1985. | The house was destroyed by a bushfire in 20XX. | You received an insurance payment as compensation for the destruction of the house. | You sold the land in the recent year and made a capital gain. | You were uncertain about using the insurance proceeds to rebuild your holiday house in the area due to the trauma associated with the bushfire and you experienced difficulties in locating a suitable replacement property. | You and your spouse jointly purchased a similar holiday house in a different location in 20YY. | You used the proceeds from the insurance payment to purchase your interest in the holiday house.