Private ruling: CGT - compulsory acquisition rollover relief
Published: May 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the same or similar purpose test contained in subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the farming land you have signed a contract for? | A1: Yes | Q2: Will the same or similar purpose test contained in subsection 124-75(4) of the ITAA 1997 be met if a replacement asset you purchase is leased to a third party? | A2: No

Relevant facts and circumstances: You are the registered proprietor as tenants in common with another individual of land (referred to as the Property). The Property has been used by you in carrying on a primary production business in partnership. There is no dwelling on the Property. It has always been your intention to farm the Property, however if health dictated, to lease it. A government authority compulsorily acquired part of the Property. The remaining part of the Property continues to be held by you and another individual as tenants in common in equal shares. An initial offer of compensation has been made, however you are still finalising your claim for compensation pursuant to the Land Acquisition and Compensation Act 1986 . You propose to individually purchase replacement properties in your own individual names. The cost of each of your replacement asset(s) will not exceed your portion of the compensation received for the compulsory acquisition of part of the Property. You have already signed a contract for purchase for farming land. You will use the farming land in a primary production business carried on by you (although this will not be the same business that operated from the Property). This farming land also contains a dwelling that you will occupy. You may acquire an additional asset that will be leased to a third party.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-B

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. 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 - Same or similar purpose: The same or similar purpose test contained in subsection 124-75(4) of the ITAA 1997 is satisfied if you use the other asset for a reasonable time after you acquired 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. This requirement can be satisfied even if you are not, nor 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 this case, you have acquired a replacement asset that will be used in a primary production business (the farming land). Your original asset was used in a primary production business. Although the replacement asset also contains a dwelling that you will occupy, we accept that on the balance, the farming land will be used for a similar purpose to the original asset. Accordingly, the same or similar purpose test will be satisfied in relation to the first replacement asset you have purchased. You have indicated that you may also acquire an additional replacement asset that will be leased to a third party. Although you have stated that you had intended to lease your original property in the future if your health required so, the same or similar purpose test considers the use of the asset just prior to the compulsory acquisition. The use of the original asset just prior to the compulsory acquisition was for use in a primary production business. Accordingly, we do not consider that a replacement asset that is used to derive passive rental income would meet the requirements of subsection 124-75(4) of the ITAA 1997.