Private ruling: Capital gains tax replacement asset roll-over
Date of advice: 12 March 2018
Published: June 2018
Ruling period: Income year ending 30 June 2018.
Date scheme commenced: 24 February 2017.

Ruling: Q1: Can you apply the replacement asset roll-over with respect to the construction of new dwellings on land you already own? | A1: No. | Q2: Will the Commissioner allow you further time under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to complete the construction of the new dwellings? | A2: Not applicable.

Relevant facts and circumstances: You owned a commercial investment property (Property A). You acquired the property after 20 September 1985 and used the property to derive rent. The property was recently subject to a compulsory acquisition by an Australian government agency. You received the proceeds of the compulsory acquisition of the property which resulted in a capital gain. You also own a post-CGT residential investment property located elsewhere (Property B). After the expiration of a lease with a tenant at Property B, you will demolish the existing single dwelling and construct a number of new dwellings. You expect the construction at Property B to be complete more than one year. You will use the newly constructed dwellings to derive rental income. The total cost of the work at Property B is expected to be less than your capital gain from Property A.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 108-D | Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 Section 124-75

Reasons for decision: Summary: Summary The newly constructed dwellings will not satisfy the requirement of acquiring another capital gains tax (CGT) asset for the purposes of the replacement asset roll-over. Detailed reasoning Section 124-70 of the Income Tax Assessment Act 1997 (ITAA 1997) allows CGT roll-over relief if an asset owned by the taxpayer is compulsorily acquired by an Australian government agency. 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 roll-over. 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. Under subsection 124-75(2) of the ITAA 1997, the owner of the asset must incur expenditure in acquiring another CGT asset except a depreciating asset whose decline in value is worked out under Division 40 of the ITAA 1997 or deductions which are calculated under Division 328 of the ITAA 1997. Application to your situation The compulsory acquisition of Property A by the government agency is an event that may give rise to a rollover, however in your situation, to access the roll-over you must incur expenditure in acquiring another CGT asset. The common law principle is that anything attached to land becomes part of the land. Therefore, generally where a building is constructed on post-CGT land, it remains the same single asset. Exceptions to the common law principle that anything attached to land becomes part of the land are set out in Subdivision 108-D of the ITAA 1997. In particular, section 108-55 sets out when a building is to be treated as a separate asset from land. Broadly, a building will be treated as a separate asset from the land to which it is affixed if the building is an asset for which a balancing adjustment must be worked out on sale or the building is post-CGT and the land to which it is affixed is pre-CGT. Furthermore under section 112-25, any splitting or changing of the land will not result in a CGT event or result in the acquisition of new assets. The demolition of the original dwelling and construction of the dwellings are considered improvements to the land. Therefore, the new dwellings at Property B are not considered to be another CGT asset for the purposes of subsection 124-75(2) of the ITAA 1997 and you cannot apply the replacement asset roll-over to the construction of the new dwelling at Property B. As you cannot access the replacement roll-over in relation to the new dwellings at Property B there has been no consideration of the Commissioner’s discretion to extend the replacement asset period. | Detailed Reasoning - Additional information: The acquisition of another investment property, either as co-owner or as the sole owner, would satisfy the requirements for the replacement asset roll-over under subsection 124-75(2).