Private ruling: Capital gains tax - acquisition and disposal
Published: November 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the portion of property that was previously compulsorily acquired from you continue to be treated as a pre-CGT asset? | A1: No

Relevant facts and circumstances: The trust owned a property that was acquired prior to 20 September 1985. The property was formally leased a related party. A notice was served by a government department to compulsorily acquire a portion of the property and create an easement through your property. After negotiations, the trust received $X in compensation for the compulsory acquisition of the portion of the property. The trust entered into a formal lease with the government department to use their portion of the land. You received notice from the government department that the lease was to expire and that the land was going to be put up for public sale. After negotiations and meetings with the government department, you offered to pay back the $X you received from the compulsory acquisition to have the land returned to the trust. The offer was agreed to and it was a condition of the contract that the land would be incorporated back into one title with the trust's remaining land. The land was transferred back to the trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(2) | Income Tax Assessment Act 1997 Paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 Section 109-5

Reasons for decision: Summary: The general rules for the acquisition of CGT assets are contained in section 109-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The table in subsection 109-5(2) of the ITAA 1997 specifically states that where an entity disposes of a CGT asset to you, you acquire it when the disposal contract is entered into or, if none, when the entity stops being the asset's owner. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. In your case you purchased a property prior to 20 September 1985 and a government department compulsorily acquired a portion of that property and paid you a settlement amount. You dispose of a CGT asset, and CGT event A1 occurs when change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2) of the ITAA 1997). While you continued to use the property for a period of time under a formal lease agreement, you were no longer the legal or beneficial owner of the property. Accordingly, you disposed of the property in accordance with subsection 104-10(2) of the ITAA 1997 when the property was compulsorily acquired. The government department later determined that the land was no longer required by them and they advised you that they intended to sell it. After negotiations, the land was transferred back to you and you returned the settlement amount that was paid to you during the compulsory acquisition process. Although we can appreciate the circumstances surrounding the events, there is no provision in the taxation legislation that could apply to treat your property as never being disposed of due to the fact that you subsequently re-acquired it. For a period of more than ten years, you were not the legal or beneficial owner of the property. Accordingly, your previous ownership of the property cannot be taken into account when determining any CGT liability. You are taken to have acquired the property from the government department when you entered into a contract to have the property transferred back to you. Although the property was re-registered under the same title as your remaining land, it will be treated as a separate asset for CGT purposes. As the date you acquired the property from the government department is after 20 September 1985, any capital gain made from this portion of the property will not be exempt from capital gains tax under paragraph 104-10(5)(a) of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.