Private ruling: Rollover relief
Date of advice: 30 January 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: Year ended 1 July 20XX

Ruling: Q1: Is the Trustee able to choose rollover relief under subdivision 124-B in relation to the compulsory acquisition of Property 1? | A1: Yes

Relevant facts and circumstances: The Trustee is carrying on a business of leasing property. In 19XX, the Trustee acquired Property 1. Property 1 was held by the Trustee for the purposes of deriving lease income. In 20XX, the Trustee was in the process of obtaining relevant approvals for the entire site to be demolished and rebuilt. Before the Development Application process was finalised, Property 1 was compulsorily acquired for $X under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) . The gross capital gain made on the disposal of Property 1 was approximately $Y. In November 20XX, the Trustee in its capacity as trustee purchased Property 2. Property 2 has never been leased, but has been held for the intended purpose of redevelopment. A decision was made to proceed with the development of Property 2 on or around December 20XX, with a Development Application being lodged in December 20XX. The development to be undertaken on the site of Property 2 will involve demolishing the existing building and construction of a new building which will be used by the Trustee for deriving lease income. It is expected that construction of the new building will take 18 months from commencement. The expected project costs for the development of Property 2 will be approximately $Z. For the period December 20XX to 31 March 20XX some expenses have been incurred in relation to the new development, and additional amounts were incurred during the period 1 April 20XX to 30 June 20XX. These expenses relate to lodging the Development Application, architecture & design, and various consultants. The new building constructed on the site of Property 2 will be a separate CGT asset under Subdivision 108-D of the ITAA 1997. Upon completion, there is no intention of the property to be sold. It will be held for commercial investment purposes as part of the business being carried on by the Trustee in its capacity as trustee.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 Section 124-15 | Income Tax Assessment Act 1997 Subsection 124-70(1) | Income Tax Assessment Act 1997 Section 124-75 | 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 Section 124-85

Reasons for decision: Summary: Summary The Trustee is able to choose rollover relief under subdivision 124-B in relation to the compulsory acquisition of Property 1. Detailed reasoning All legislative references are to the Income Tax Assessment Act 1997. Division 124 allows for a replacement asset roll-over to defer the making of a capital gain or loss from a CGT event happening until a later CGT event in certain circumstances. In particular, roll-over relief may be available where a CGT asset is compulsorily acquired, lost or destroyed (Subdivision 124-B). Relevant to your circumstances, the CGT asset must have been compulsorily acquired in the following circumstances: a. by an Australian government agency (paragraph 124-70(1)(a)), or b. disposed of to an entity following the service of a notice advising that the asset will be compulsorily acquired if agreement cannot be reached for you to dispose of the asset to an entity (paragraph 124-70(1)(c)). In circumstances where money is received for the compulsory acquisition of an asset, section 124-75 provides that you can choose to obtain a roll-over if: a. you incur expenditure in acquiring another CGT asset, which is not a depreciating asset, or trading stock. (subsections 124-75(2) and (5)) b. at least some of the expenditure must be incurred 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. The Commissioner can extend this time period in special circumstances. (subsection 124-75(3)) c. if the original asset was used in your business, installed ready for use, or in the process of being installed ready for use, just before the event happened, the replacement asset must be used in your business, or installed ready for use, for a reasonable time after it is acquired. (subsection 124-75(4)) d. if you are not carrying on a business, the replacement asset must be used for the same, or a similar purpose as the original asset for a reasonable period of time after it is acquired. (subsection 124-75(4)) Subsection 124-15(1) provides that Division 124 roll-over relief is available if your ownership of one or more CGT assets ends and you acquire one or more CGT assets in any of the situations covered by the Division. TD 2000/41 confirms that there is no restriction on the number of CGT assets which may be treated as replacement assets for the purposes of Subdivision 124-B, provided that each asset satisfies the relevant requirements of the Subdivision. TD 2000/40 states that whether ‘special circumstances’ (subsection 124-75(3)) exist to warrant the Commissioner extending the time period for incurring expenditure on a replacement asset will depend on the facts of each case. The examples provided in TD 2000/40 suggest that provided the delays are outside your control, the Commissioner will generally allow further time. An improvement to an existing CGT asset can be a replacement CGT asset if it is taken to be a separate CGT asset (for example by Subdivision 108-D) and the improvement satisfies the requirements of Subdivision 124-B. The table in Section 124-85 outlines the consequences where money is received for the compulsory acquisition. In the Trustee’s circumstances, there has been a compulsory acquisition of Property 1 in circumstances covered by subsection 124-70(1). The timing of the CGT event that happened on the compulsory acquisition of Property 1 will be the date that the exchange of contracts occurred. Therefore, for the purposes of the Subdivision 124-B roll-over relief, you must have incurred expenditure on the replacement asset(s), and at least some of the expenditure must have been incurred within a period of one year prior to the CGT event happening and one year after the end of the income year in which the CGT event happened. Property 2 was acquired by the Trustee in November 20XX, which is approximately 7 years prior to the CGT event happening. Therefore, the acquisition of Property 2 cannot qualify for roll-over relief because it occurred at a point far too soon (approximately 7 years prior to the CGT event happening). However, the construction of a new building will be a separate CGT asset under Subdivision 108-D, and therefore this new building can qualify as a replacement asset, provided all other requirements of Subdivision 124-B are met. Property 1 was used in your business of deriving income from leasing real property. Once completed, the replacement asset will also be used in your business of deriving income from leasing real property. Therefore, the requirements of subsection 124-75(4) will be met. The development application for the new building was lodged in December 2015, which was more than 12 months before the CGT event happened. However, expenditure has been incurred in acquiring the new CGT asset during the period that is no earlier than one year before and one year after the end of the income year in which the CGT event happened. Subsection 124-75(3) only requires ‘at least some of the expenditure incurred’ to be within this time period. There is no requirement that all expenditure be incurred during this period. Additionally, expenditure on the replacement asset can be incurred prior to the issue of the proposed acquisition notices under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Taxation Determination 2000/37). Therefore, the construction of the new building will meet the requirements of subsection 124-75(3) because some expenditure has been incurred during the period commencing 12 months before and ending 12 months after the end of the income year in which the CGT event happened. Accordingly, the construction of the new building will satisfy the requirements of subdivision 124-B, and you can choose to apply the replacement asset roll-over. Because the amount received for the compulsory acquisition of Property 1 is not greater than the expected cost of the new asset, the gain from the compulsory acquisition will be disregarded when working out your net capital gain or capital loss for the income year ended 30 June 20XX. Additionally, the cost of the new asset will be reduced by the amount of the gain (Item 3 of the table in subsection 124-85(2)). Note, should the actual costs of the development end up being less than the amount received on disposal of Property 1, items 1 or 2 of the table in subsection 124-85(2) will apply, and you may need to request an amendment to your 2017 income tax return as a result. You have advised that you estimate the new development will take approximately 2 years from final approval of the development application (expected January 20XX ) with potential delays of up to 6 months due to unforeseen events such as inclement weather. The Commissioner will allow any expenditure incurred on the replacement asset that is incurred after 1 December 2015 to be taken into account in calculating the ‘expenditure incurred on the replacement asset’ for the purposes of subsection 124-85(2).