Private ruling: Capital Gains Tax - Replacement Asset Rollover
Date of advice: 26 July 2016
Published: September 2016
Ruling period: Year ended 30 June 20WW | Year ended 30 June 20XX | Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20VV

Ruling: Q1: Will the Commissioner exercise his discretion pursuant to subsection 124-75(3) of the ITAA 1997 to allow an extension of time in which to spend some of the proceeds following the compulsory acquisition of the taxpayer's asset in order to meet the eligibility requirements for a Subdivision 124-B rollover? | A1: Yes | Q2: If the taxpayer is successful in receiving an extension of time from the Commissioner in respect of question 1 above, will the Commissioner allow a further time until 30 June 20ZZ for the taxpayer to acquire a replacement asset? | A2: Yes

Relevant facts and circumstances: Background The taxpayer is a company with sites across inner city and suburban NSW and owns a number of land parcels in an inner city suburb of NSW. In September 20VV, the taxpayer received a notice from an Australian agency advising that their landholdings was to be compulsorily acquired, as pursuant to the Road Act 1993 (NSW), for the purposes of the motorway construction. A couple of months later in 20VV, an acquisition notice was published in the XY to effect the compulsory acquisition of the landholdings. In 20WW, the agency wrote to the taxpayer and offered them an amount in compensation for the compulsorily acquired landholding. The agency also enclosed a compensation notice and the Valuer-General's determination, acquisition notice published in the XY in late 20VV, and the deed of release and authority. The taxpayer was not satisfied with the offer, and so they entered into negotiations with the agency in order to reach an agreement for the price of the landholdings. Due to unsuccessful negotiations, the taxpayer commenced legal proceedings in the relevant Court in September 20WW. Soon after, the taxpayer received the % of the offer from the agency while the matter is before the Court. Search for replacement assets The taxpayer also engaged the expertise of a commercial real estate company to help identify suitable properties to replace the landholdings compulsorily acquired by the agency, and to confirm the scarce nature of suitable and commercially viable properties for sale. In July 20WW, the commercial real estate company provided the taxpayer with a list of properties for consideration. However, the taxpayer was either unsuccessful in acquiring property, or finding it not commercially viable for their business. Compensation dispute The taxpayer commenced legal proceedings in the relevant Court in September 20WW. As a result of these legal proceedings, the taxpayer has been delayed in purchasing a replacement asset. The taxpayer asserts that the final compensation amount for the landholdings is yet to be determined by the Court. Until the legal dispute is resolved and the taxpayer knows with certainty the ultimate compensation amount they will receive, they will not be in a position to acquire the replacement assets. The taxpayer has been advised that the dispute is unlikely to settle before 30 June 20YY. As the replacement assets will be used for the same purpose for which the taxpayer used the landholdings, the taxpayer asserts that the replacement assets need to be large commercial plots situated close to the city of NSW CBD, but they are infrequently available for sale on the market. Given this and the quantum of compensation, it may take the taxpayer a substantial period of time to identify an acceptable property that becomes available for sale and negotiate the purchase. As such, the taxpayer has requested an extension of time till 30 June 20ZZ to enable them to locate and acquire a suitable replacement asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(6); | Income Tax Assessment Act 1997 Subsection 124-70(1); | Income Tax Assessment Act 1997 Subsection 124-70(2); | 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 124-75(6); and | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: The Commissioner will exercise his discretion pursuant to subsection 124-75(3) of the ITAA 1997 to allow an extension of time in which to spend some of the proceeds following the compulsory acquisition of the taxpayer's asset in order to meet the eligibility requirements for a Subdivision 124-B rollover. | Detailed Reasoning - Detailed reasoning: In a situation where a change of ownership triggering CGT event A1 arises as a result of a compulsory acquisition of a CGT asset by another entity, section 104-10(6) of the ITAA 1997 provides that the time that the compulsory acquisition is taken to have occurred will be the earliest of when compensation is received or when the change of ownership occurs. Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset is compulsorily acquired by an Australian Edited version of private advice agency. A replacement-asset rollover allows an entity, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. Subsection 995-1(1) of the ITAA 1997 defines an Australian agency as a Commonwealth, a State or a Territory or an authority of Commonwealth or of a State or Territory. 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 rollover (section 124-70(2) of the ITAA 1997). On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening. Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Subsection 124-75(3)(b) of the ITAA 1997 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. Section 124-75(4) of the ITAA 1997 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 (section 124-75(5) of ITAA 1997), nor become a "registered emissions unit" just after the acquisition (section 124-75(6) of ITAA 1997). 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 (TD 2000/40) which provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what are 'special circumstances'. TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case. Relevantly, Example 3 in TD 2000/40 provides an illustration in which a taxpayer's asset is compulsorily acquired by a State authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In this instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer. In determining if his discretion will be exercised, the Commissioner also considers 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; • account must be had of any unsettling of people, other than the Commissioner, or of established practices; • 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. | Detailed Reasoning - Application to your circumstances: Applying the above principles to the present case, subdivision 124-B allows the taxpayer to choose rollover relief for its landholdings (CGT assets) compulsory acquired by the agency, as they received money as part compensation. Under section 104-10(6) of the ITAA 1997, CGT event A1 occurred when the agency took possession of the landholdings in December 20VV and the change of ownership of the asset occurred. The taxpayer would ordinarily have until 30 June 2016 to incur at least some of the expenditure in acquiring a replacement asset under subsection 124-75(3)(b) of the ITAA 1997. However, the taxpayer has sought the Commissioner's discretion to allow an extension of time due to special circumstances. According to the information provided, the taxpayer disputed the amount offered by the agency as proceeds for the land compulsorily acquired, and has commenced proceedings to claim a greater amount under the Land Acquisition ( Just Terms Compensation ) Act 1991. As such, purchasing a replacement asset has been delayed. The lack of certainty as to the amount and timing of the compensation the taxpayer will receive will also impede their ability to commence searching for a replacement asset. Furthermore, the specific nature of the asset to be replaced, the substantial amount to be invested, and the possibility of a lengthy process in respect of such an acquisition means that further delays in purchasing a replacement asset may be experienced. Based on these facts, it is deemed that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension to obtain a replacement asset, as it would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay. By granting this additional time: • there does not appear to be any prejudice to the Commissioner or any other parties; • there is no unsettling of people or of established practices; • there does not appear to be any mischief involved in this case; and • the Commissioner considers it to be fair to people in like positions and the wider public interest. As such, the Commissioner will exercise his discretion under subsection 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for landholdings that were compulsorily acquired by the agency. | Summary: The Commissioner will exercise his discretion under subsection 124-75(3)(b) of the ITAA 1997 to allow an extension until 30 June 20ZZ to obtain a replacement asset for landholdings that were compulsorily acquired by the Australian agency. | Detailed Reasoning - Detailed reasoning: As determined earlier, the Commissioner will exercise his discretion under subsection 124-75(3)(b) of the ITAA 1997 to allow an extension to obtain a replacement asset for landholdings that were compulsorily acquired by the agency. Neither the legislation or TD 2000/40 provide guidance regarding how much additional time would generally be acceptable for the Commissioner in the case of special circumstances. Given your special circumstances discussed previously, the Commissioner considers that your request for an extension until 30 June 20ZZ would be acceptable.