Private ruling: Capital gains tax (CGT) - replacement asset roll-over – Commissioner’s discretion
Date of advice: 3 May 2018
Published: July 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a roll-over under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) for the commercial premises that was compulsory acquired by the State Authority? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to extend the one year period to acquire a replacement asset? | A2: Yes.

Relevant facts and circumstances: XYZ Pty Ltd (XYZPL) is an Australian private company incorporated under the Corporation Act 2001 . XYZPL was the registered proprietor of a property (the property). XYZPL was in a business of holding a commercial property for the purpose of renting to an associated entity of XYZPL and controlled by the same taxpayers. The property was used as the main works depot for the associate entity up until it was acquired by the State Authority. XYZPL was served with a proposed acquisition notice by the State Authority, advising that its interest in the Property would be compulsorily acquired if the contracts have not been exchanged by a certain date. The property was compulsorily acquired by the State Authority by the said date and the acquisition notice was published in Government Gazette. The effect of the acquisition notice is to extinguish XYZPL’s interest in the land and convert such interest into a claim for monetary compensation. XYZPL received an advance payment from the State Authority, electronically in their nominated bank account. Prior to receiving the advance payment of compensation XYZPL was unable to acquire a replacement property due to its inability to fund it without the compensation amount. An ongoing dispute with the State Authority added to their inability to acquire a replacement asset. A replacement property was later acquired by XYZPL. XYZPL now seeks the Commissioner to exercise his discretion to extend the one year period.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 section 124-75 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . The Commissioner will exercise his discretion pursuant to paragraph 124-75(3)(b) and allow an extension of time to acquire a replacement asset where the original asset was compulsorily acquired by a State Authority in order for you to obtain a capital gains roll-over relief. | Detailed Reasoning - Detailed reasoning: CGT event A1 occurs when an ownership in a CGT asset (property) is transferred to another entity (section 104-10). If a change of ownership triggers CGT event A1 as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition, subsection 104-10(6) provides that the time of the event is the earliest of when compensation is received or when the change of ownership occurs. | Detailed Reasoning - CGT roll-over: Under the provisions of Subdivision 124-B, an entity may be able to choose to roll-over a capital gain that results from a compulsory acquisition of a CGT asset they own. One of the circumstances in which a taxpayer can make this choice is if the asset is compulsorily acquired by an Australian government agency (paragraph 124-70(1)(a)). 'Australian government agency' is defined in subsection 995-1(1) as the Commonwealth, a State or Territory, or an authority of one of them. 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 (subsection 124-70(2)). On satisfying these conditions, section 124-75 provides other requirements which must be satisfied if money is received for the event happening. Subsection 124-75(2) requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) requires the entity to incur at least some of the expenditure in acquiring this replacement CGT asset 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. Subsection 124-75(4) requires that the replacement asset acquired must be used for the same or similar purpose as the taxpayer used the original asset. This replacement asset cannot become trading stock just after the acquisition or be a depreciating asset (subsection 124-75(5)), nor become a “registered emissions unit” just after the acquisition (subsection 124-75(6)). Applying the relevant legislation to your case, Subdivision 124-B allows you to choose roll-over relief for the property (CGT assets) compulsorily acquired by the State Authority, as you received money as compensation from the State Authority, a state-owned corporation and an authority of the State government. The compulsory acquisition of your property by the State Authority satisfies the conditions in subsection 124-70(1). The receipt of monetary compensation as advance payment for compulsory acquisition of the property meets the conditions of subsection 124-70(2). Under subsection 104-10(6), CGT event A1 occurred when the State Authority took possession of the property. Under paragraph 124-75(3)(b) you would need to acquire a replacement asset no later than one year after the end of the income year in which the gazettal took place. You acquired a replacement property on a certain date in place of the property of the associate entity. Accordingly, you requested the Commissioner to exercise his discretion to allow an extension of time to meet the requirements set under paragraph 124-75(3)(b) for a roll-over to apply to your replacement asset. As you did not incur any expenditure on a replacement asset prior to the CGT event relating to the compulsory acquisition of the property, to be eligible for the roll-over in section 124-70 you must meet the conditions in paragraph124-75(3)(b). | Detailed Reasoning - Special Circumstances: In determining whether special circumstances exist for the Commissioner to extend the period in which 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 127-75(3) of the Income Tax Assessment Act 1997? (TD 2000/40) which provides guidance on interpreting subsection 124-75(3), in particular what are ‘special circumstances’. You state prior to receiving the advance payment of compensation on certain date you were unable to acquire a replacement property due to your inability to fund it without the compensation amount. An ongoing dispute with the State Authority added to your inability to acquire a replacement asset. As such it was not feasible to incur some expenditure on a replacement asset until such time as the dispute was resolved and the amount available to acquire a replacement asset was known.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for XYZ Pty Ltd.