Private ruling: Commissioner's discretion - replacement assets
Date of advice: 7 August 2024
Published: 16 September 2024
Ruling period: Year ended 30 June 2023 | Year ended 30 June 2024 | Year ending 30 June 2025
Date scheme commenced: 18 May 2023

Ruling: Q1: Will the Commissioner exercise his discretion under paragraph 124-75(3) of the Income Tax Assessment Act (ITAA 1997) to allow further time to incur expenditure or replacement assets to 30 June 2025? | A1: Yes.

Relevant facts and circumstances: X in its capacity as trustee for the Y Family Trust (the Trustee and the Trust, respectively) owned real property located at Z (Property). The Property had been used by the Trust as a passive investment property, earning rental income payable by commercial tenants (Tenants). In 2023 the Trustee received notice that a state government authority intended to acquire the Property from the Trustee. The state government authority offered the Trustee compensation in respect of the compulsory acquisition of the Property. The state government authority completed the compulsory acquisition of the Property in 2023 and an amount was subsequently paid to the Trustee. Subsequently the state government authority increased its offer of compensation to the Trustee. The Trustee then engaged its own valuer who advised that there were errors in the valuation and the Trustee's valuer undertook a revised valuation (Revised Valuation). Based on the Revised Valuation the Trustee proposed a higher compensation figure for the Property. The Trustee has been actively looking for a replacement real property(s) of similar characteristics to the Property since 2023. The Trustee has attended property auctions, inspected potential properties, closely monitored the property market, and liaised with commercial real estate agents on a regular basis. In 2023 the Trustee identified a suitable site (Identified Site). A Heads of Agreement (HOA) was signed in respect of the Identified Site by the Trustee. Pursuant to the special conditions in the HOA, a majority of the Tenants of the Property would have relocated to the Identified Site at the completion of relevant building works (the Buildings). However, due to finance and security issues, the Vendor withdrew from the HOA. The Trustee is hopeful that it will eventually be able to purchase the Identified Site. The Trustee is currently: • continuing investigations to potentially acquire the Identified Site once the Buildings are completed; and • continuing investigations for other suitable replacement properties.

Relevant legislative provisions: Section 104-10 of the ITAA 1997 | Section 124-70 of the ITAA 1997 | Section 124-75 of the ITAA 1997 | Subsection 995-1(1) of the ITAA 1997

Reasons for decision: Detailed Reasoning - Involuntary disposal of a CGT asset: Section 124-70 of the ITAA 1997 describes different events in which a roll-over is available to an entity if that event happens to the Capital Gains Tax (CGT) asset of that entity. According to subparagraph 124-70(1)(a), an entity is able to choose a roll-over if the CGT asset that the entity owns is compulsorily acquired by an Australian government agency. Subparagraph 124-70(2)(a) of the ITAA 1997 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) of the ITAA 1997 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 a state government authority. Therefore, the definition of Australian government agency is met. The Trustee is able to 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 of the ITAA 1997 are met. According to section 124-75 of the ITAA 1997: "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. 124-75(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. 124-75(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 relevant provision for the Trustee is paragraph 124-75(2)(a) of the ITAA 1997 whereby the Trustee is required to incur expenditure to acquire another CGT asset. Subsection 124-75(3) of the ITAA 1997 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; or • when the entity becomes the asset's owner; or • when the entity entered it under that power, or • when the entity took possession under that power. In the Trustee's case, the latest date which the Trustee must incur expenditure on the replacement CGT asset is 30 June 2024, unless the Commissioner allows further time in special circumstances. The Trustee has not acquired real property prior to 30 June 2024, and therefore the Trustee has not satisfied subsection 124-75(3) of the ITAA 1997, unless the Commissioner allows it further time to incur the relevant expenditure on the basis of special circumstances. | 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) of the ITAA 1997. What constitutes special circumstances depends on the facts of each particular case. In determining whether special circumstances exist that will allow the Commissioner to extend the period for the Trustee 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? (TD 2000/40). 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. Of particular relevance in this case is example 3 of TD 2000/40 which 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." Example 2 in TD 2000/40 is also relevant to this case. It states: "5. Gordon owned a wool processing factory which was destroyed by fire. Gordon immediately commences to negotiate to purchase a nearby factory, taking possession pending settlement. After lengthy negotiations, however, the purchase of the factory falls through. He then purchases another property but just outside the 2 year time period. On these facts, we would accept that Gordon has done what is reasonable to acquire a replacement asset and we would allow him further time." In determining if the discretion would be exercised, the following considerations are relevant to the Commissioner's determination: • 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. On a consideration of the Trustee's submissions and the facts in this case, the Commissioner agrees to grant the Trustee a further extension of time to 30 June 2025 for the acquisition of a replacement asset pursuant to subsection 124-75(3) of the ITAA 1997. This decision is based on the following considerations: • The Trustee has provided acceptable explanations for the period of extension requested. There are broadly 2 reasons why it would be fair and equitable in the circumstances to provide the extension. • Firstly, the final amount of compensation payable is currently in dispute. • Secondly, the Trustee has demonstrated that it has done what is reasonable to acquire a replacement asset, and that it is continuing its efforts in respect of the purchase of the Identified Site. It is noted in this regard that the Trustee had since 2023 been actively engaged in attending property auctions, property inspections, and liaising with commercial real estate agents on a regular basis, culminating in the execution of the HOA in 2023 in respect of the Identified Site. The Identified Site was regarded largely as a replacement asset for the Trustee: it was intended, in particular. that the majority of the Tenants of the Property would relocate to it. The Trustee remains hopeful that the commercial dealings regarding the Identified Site may be able to be renewed. In light of the above, the Commissioner considers that the Trustee has done what is reasonable to acquire a replacement asset. It is considered to be further relevant that the particular replacement asset in this case (the Identified Site) may, in fact, be eventually acquired by the Trustee.