Private ruling: Capital Gains Tax compulsory acquisition rollover
Date of advice: 19 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the purchase of a replacement asset that is a residential rental property satisfy the requirements of subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997) if the original CGT asset was a commercial rental property? | A1: Yes | Q2: Where you acquire more than one replacement asset each, will each replacement asset retain pre-CGT status, provided the requirements contained in subsections 124-75(3) to 124-75(6) of the ITAA 1997 are met in relation to each asset? | A2: Yes, provided that the total expenditure on all of the assets you acquire does not exceed 120% of the market value of the compulsorily acquired property on the date of the CGT event.

Relevant facts and circumstances: You own a commercial rental property (the Property). You acquired the Property prior to 20 September 1985. The Property has been used by you to gain rental income. An Australian Government agency (the Agency) compulsorily acquired the Property. You are still in discussion about the amount of compensation you are to receive from the Agency. You propose to purchase a residential rental property as your replacement property. You may purchase more than one rental property as replacement assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 Section 108-5

Reasons for decision: Summary: Under the provisions of Subdivision 124-B of the ITAA 1997, an entity may be able to choose to roll-over a capital gain that results from a compulsory acquisition of a capital gains tax (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. Where you receive money for the compulsory acquisition, section 124-75 of the ITAA 1997 stipulates the further requirements that must be met in order to choose the rollover: • you must incur expenditure in acquiring another CGT asset that is not a depreciating asset (the replacement asset) (subsection 124-75(2) of the ITAA 1997) • as least some of that expenditure must be incurred no earlier than one year before the CGT event happens and no later than one year after the end of the income year in which the CGT event happens (or a longer time allowed by the Commissioner) (subsection 124-75(3) of the ITAA 1997) • the replacement asset must be either • used in the same business that the original asset was used in just prior to the compulsory acquisition for a reasonable time after you acquire it; or • be used for the same or similar purpose as the original asset for a reasonable time after you acquire it (subsection 124-75(4) of the ITAA 1997) • the replacement asset cannot become an item of your trading stock just after you acquire it nor can it be a depreciating asset (subsection 124-75(5) of the ITAA 1997); and • the replacement asset cannot become a registered emissions unit of yours just after you acquire it (subsection 124-75(6) of the ITAA 1997) | Detailed Reasoning - Replacement CGT Asset: A CGT asset is defined in section 108-5 of the ITAA 1997 as any kind of property or a legal or equitable right that is not property. If you own part of or an interest in any kind of property, that interest is a CGT asset. In cases where an entity receives money as a result of the event, the entity must satisfy the requirements of section 124-75 of the ITAA 1997 for the roll-over to be available. This means that: • the entity must incur expenditure to acquire another CGT asset • at least some of the expenditure to acquire the new CGT asset must be incurred by the entity no earlier than one year before the event happens or no later than 12 months after the end of the income year in which the event happened. There are two further requirements in subsection 124-75(4) of the ITAA 1997, either of which can be satisfied. The requirement that applies to this case is the same or similar purpose test. This test is satisfied if you use the other asset for a reasonable time after you acquire it and your use of that asset is for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset just before the event giving rise to a roll-over under subdivision 124-B of the ITAA 1997 happened. The second requirement can be satisfied by using another CGT asset for the required purpose even if you are not, or have never been, carrying on a business. Taxation Determination TD 2000/42 provides some guidance on the application of the 'same or similar purpose test' required by subsection 124-75(4) of the ITAA 1997 and notes that: • the words 'use the other asset ... for the same purpose ... or for a similar purpose' should be read in their context in subsection 124-75(4) of the ITAA 1997; and • whether a CGT asset is used for the same or a similar purpose as another asset is a question of fact and degree. In your case, the Agency has compulsorily acquired a commercial investment property from you that was used to derive rental income. You intend to use the CGT roll over provision with the disposal of this property by purchasing a residential investment property; this property will also be used to derive rental income. The same or similar purpose test contained in subsection 124-75(4) of the ITAA 1997 will be satisfied where the replacement asset is used to derive rental income, irrespective of whether the replacement property is commercial or residential. Accordingly, the same or similar purpose test will be satisfied if you purchase a residential investment property that is used to derive rental income within 12 months after the end of the income year in which the CGT event occurs. | Detailed Reasoning - Pre-CGT Assets: If the compulsorily acquired asset was acquired by you prior to 20 September 1985, subsection 124-85(3) of the ITAA 1997 provides that your replacement asset will be taken to have been acquired before that date provided that the expenditure to acquire it is not more than 120% of the market value of the original asset at the time the CGT event occurred. Taxation Determination TD 2000/41 provides that there are no restrictions on the number of CGT assets which may be treated as replacement assets for the rollover contained in Subdivision 124-B of the ITAA 1997 provided that each replacement asset satisfies the other relevant requirements of the Subdivision. You have indicated that you may acquire more than one replacement asset. Provided that each of your replacement assets meets the requirements section 124-75 as mentioned above and the total expenditure on all of the replacement assets does not exceed 120% of the market value of the asset compulsorily acquired at the date of the CGT event then you are able to purchase numerous replacement assets.