Private ruling: Second extension of time to acquire a replacement asset
Date of advice: 28 November 2023
Published: 8 January 2024
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner of Taxation exercise his discretion to allow the taxpayer an extension of time to 30 June 20XX under subsection 124-75(3) of the Income Tax Assessment Act 1997? | A1: Yes

Relevant facts and circumstances: The taxpayer, the trustee of an Australian discretionary trust, and another party (together, the Owners) acquired a property (the property) which was leased to third parties and from which rental income was derived. The property was acquired after 20 September 1985. The property was compulsorily acquired by a State authority, XYZ, and most of the compensation for the compulsory acquisition has been received by the taxpayer. The Owners lodged an objection in the Land and Environment Court of New South Wales (the court) to the amount of compensation offered, requesting more compensation. This claim may increase during the proceedings. XYZ has since appealed the court determination to the NSW Court of Appeal (Appeal court). It is likely that the matter will ultimately be appealed to the High Court due to the precedential nature of the issues and the substantial amount of compensation in this case. The taxpayer submits that it cannot determine the amount of proceeds it will receive to invest to acquire a replacement asset until the relevant court proceedings have been completed and the final compensation amount is known. Given the status of these proceedings, the taxpayer expects that this amount may not be known until sometime in the year ended 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 124-75(3)

Reasons for decision: Detailed Reasoning - Involuntary disposal of a CGT asset: Section 124-70 describes different events when a roll-over is available to an entity if that event happens to the Capital Gains Tax (CGT) asset of that entity. According to subsection 124-70(1), an entity can choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency. Subsection 124-70(2) states that to be eligible for a roll-over, the entity must receive money or another CGT asset (except a car, motorcycle, or similar vehicle) or both as compensation for the event happening. Subsection 995-1(1) defines an Australian government agency as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. In this case, the property was compulsorily acquired by XYZ, a state authority, and the taxpayer had received most of the payment for the acquisition. Therefore, the taxpayer can choose a roll-over in relation to the capital gain that it received from the compulsory acquisition provided other requirements as stated in section 124-75 are met under paragraph 124-75(3)(b). According to section 124-75: (1) If you receive money for the event happening, you can choose to obtain a roll-over only if these other requirements are satisfied. (2) You must: (a) incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline in value is worked out under Division 40 or deductions for which are calculated under Division 328), or (b) if part of the original asset is lost or destroyed - incur expenditure of a capital nature in repairing or restoring it. (3) At least some of the expenditure must be incurred: (a) no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens, or (b) no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens. In this case, the taxpayer's original asset, namely the property, is not partially lost or destroyed. Therefore, the relevant provision for the taxpayer is paragraph 124-75(2)(a) whereby the taxpayer is required to incur expenditure to acquire another CGT asset. Subsection 124-75(3) requires you to incur some of the expenditure either one year before or one year after the end of the income year in which the event happens or within such further time as the Commissioner allows in special circumstances. The time of the event is determined by subsection 104-10(6). The time of the event will be the earliest of: • when you received full compensation from the entity • when the entity becomes the asset's owner • when the entity entered it under that power, or • when the entity took possession under that power. The taxpayer has requested further time to incur expenditure in acquiring a replacement asset under paragraph 124-75(3)(b). | Detailed Reasoning - Special circumstances: There are no legislative provisions which provide guidance as to what may constitute special circumstances for the purposes of subsection 124-75(3). The matter depends on the facts of each particular case. In determining whether special circumstances exist that will allow the Commissioner to extend the period to acquire a replacement asset, regard must be had to Taxation Determination TD 2000/40 Income tax - capital gains - what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997? In determining if the discretion would be exercised, the Commissioner will consider the following factors: • there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension • account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension • there must be a consideration of fairness to people in like positions and the wider public interest • whether there is any mischief involved, and • a consideration of the consequences. TD 2000/40 states that the expression 'special circumstances', in the context of subsection 124-75(3) of the ITAA 1997 by its nature, is incapable of a precise or exhaustive definition. Some examples of special circumstances are provided under the tax determination. In prior cases, the Commissioner has granted an extension of time where there have been special circumstances and an acceptable explanation for the period of extension requested. These can include, but are not limited to, medical or financial issues, personal issues or natural disasters. Example 3 of TD 2000/40 states: 6. Graeme had a commercial property compulsorily acquired by a State authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time. In this case, the owners (including the taxpayer) lodged an objection in the court to the amount of compensation offered by XYZ. The court decision was handed down in favour of the owners; however the matter remains unresolved as XYZ has appealed this determination. It is accepted that, given the precedential matters involved and the amount of compensation at stake, it is likely that a special leave to appeal to the High Court will occur. The taxpayer has submitted that accordingly, it is expected that the exact compensation amount may not be known until sometime in the year ended 30 June 20XX. To date, the taxpayer has not acquired a replacement asset for the Property and is unlikely to acquire a replacement asset until after the completion of the litigation and the payment of the final compensation amount. The Commissioner considers that it would be reasonable to give the taxpayer further time to search for a replacement asset for the property following the final determination in the matter, given that the quantum of compensation which will ultimately be received by the taxpayer, being essential to the acquisition of a suitable replacement property, will not be known prior to the determination. | Detailed Reasoning - Conclusion: Based on the guidelines in TD 2000/40 and upon a review of the facts in this case, it is considered that the taxpayer's situation falls within scope of what would be considered special circumstances which would warrant the Commissioner allowing further time under paragraph 124-75(3)(b) to 30 June 20XX.