Private ruling: Compulsory acquisition rollover relief
Published: October 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: If the original assets were residential rental properties will a commercial rental property qualify as a complying rollover asset under subsection 124-75(4) of the ITAA 1997 to use "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"? | A1: Yes. | Q2: Can the aggregate market value of the original assets compulsorily acquired be used as the market value for the original asset, when acquiring the replacement asset, for the purposes of subsection 124-85(3) of the ITAA 1997? | A2: Yes. | Q3: Can the original assets be replaced with any number of replacement assets, as long as they do not breach the requirements of subsection 124-85(3) of the ITAA 1997? | A3: Yes. | Q4: When purchasing the replacement asset, are the requirements under subsection is 124-75(3) of the ITAA 1997 satisfied if a contract has been entered in to and a deposit has been paid, even though settlement has not occurred? | A4: Yes.

Relevant facts and circumstances: The trustee the trust acquired pre-CGT residential properties. No significant improvements which would be considered separate CGT assets under section 108-70 of the ITAA 1997 have been carried out since 20 September 1985. The properties have been used as rental properties to derive rental income since they were acquired. All properties are being compulsorily acquired. The consideration offered by the acquirer in exchange for the properties is yet to be confirmed, however, it is likely the Trust will only receive cash in exchange for the properties. The Trust wishes to access the rollover under Subdivision 124-B of the ITAA 1997 to acquire replacement assets and maintain the pre-CGT status of the assets. The Trust is considering purchasing a commercial rental property as the replacement asset for the nine original residential rental properties. The replacement asset will be properties used to derive rental income. The Trust has not yet entered in to any discussions or contracts for the purchase of a replacement asset. The requirements under subsection 124-70(1)(a) and 124-70(2) of the ITAA 1997 are satisfied. The Trust intends to incur expenditure on replacement CGT assets, to satisfy section 124-75 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 124-70 | Income Tax Assessment Act 1997 (ITAA 1997) section 124-75 | Income Tax Assessment Act 1997 (ITAA 1997) section 124-85

Reasons for decision: Summary: Subsection 124-75(4) of the ITAA 1997 states that the replacement asset must be used for a similar purpose as the original asset to be eligible for the rollover provision. Taxation Determination TD 2000/42 provides guidance as to whether an asset is used for a similar purpose. The determination states that whether an asset is used for the same or similar purposes as another asset is a question of fact and degree. Where an original asset was used to earn residential rental income and a replacement asset is used to earn commercial rental income, those uses would fall within the scope of the same or similar purpose test to satisfy the purposes of the legislation. In your case, the Trust acquired residential properties before 20 September 1985 which have been used as a passive investment to produce rental income. The Trust is considering replacing these pre-CGT assets, which have been compulsorily acquired, with a commercial rental property to be held as a passive investment and produce rental income. Accordingly, this replacement asset would satisfy the requirements under subsection 124-75(4) of the ITAA 1997. | Detailed Reasoning - Question 2 & 3: Subsection 124-85(3) of the ITAA 1997 explains that a replacement asset, that is replacing a pre-CGT original asset, will be considered to have been acquired before 20 September 1985 if the expenditure is not more than 120% of the market value of the original asset when the event happened. In your case, the Trust is yet to determine how to replace the original pre-CGT assets which are being compulsorily acquired. The Trust is considering the possibility of replacing the investment properties with a smaller number of assets - such as one large property. Taxation Determination TD 94/77 states there is no restriction on the number of assets that can be acquired in replacement of an original asset. In order to fully defer the making of a capital gain from a CGT event, replacement assets must be purchased for an amount at least equivalent to all of the amounts received in compensation for the original assets. Accordingly, in your case, the Trust is able to use the combined market value of the original assets to purchase any number of replacement assets, and be in accordance with subsection 124-85(3) of the ITAA 1997. | Detailed Reasoning - Question 4: If you receive money for a CGT event happening, you can choose to obtain a roll-over if you incur expenditure in acquiring another CGT asset (replacement asset), and at least some of the expenditure must be incurred no earlier than one year before the event happens and no later than one year after the end of the income year in which the event happens. If the Trust enters into a contract within this time limit, has paid a deposit and the contract is made unconditional, but settlement has not occurred, it is considered that sufficient expenditure has been incurred and the requirements under subsection 124-75(3) of the ITAA 1997 will be satisfied.

Reasons for decision: Section 124-70 of the ITAA 1997 allows a CGT roll-over relief if an asset owned by the taxpayer is compulsorily acquired by an Australian government agency. A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for roll-over. On satisfying these conditions section 124-75 and 124-85 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening.