Private ruling: Replacement asset roll-over
Published: September 2011
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the disposal of your commercial investment property be an event giving rise to a roll-over under subsection 124-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the same or similar purpose test in subsection 124-75(4) of the ITAA 1997 be satisfied if a residential investment property, for the purpose of leasing out, is purchased to replace your commercial investment property, that was leased out? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 124-70 | Income Tax Assessment Act 1997 Section 124-75

Reasons for decision: Summary: All legislative references referred to herein are from the ITAA 1997, unless otherwise stated. Under the provisions of subdivision 124-B, 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 (paragraph 124-70(1)(a). 'Australian government agency' is defined in subsection 995-1(1) as the Commonwealth, a State or Territory, or an authority of one of them. Another circumstance where the choice can be made is where you dispose of an asset to an entity in the circumstances meeting all of the following conditions: · the disposal takes place after a notice was served on you by or on behalf of the entity · the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement · the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity · the compulsory acquisition would have been under a power of compulsory acquisition conferred by an Australian law (paragraph 124-70(1)(c). | Detailed Reasoning - Expenditure of monies: In cases where an entity receives money as a result of the event, the entity must satisfy the requirements of section 124-75 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), either of which can be satisfied. | Detailed Reasoning - Same or similar purpose: The first requirement is satisfied if, just before the event giving rise to a roll-over under subdivision 124-B happened, the original asset: · was used in your business; · was installed ready for use in your business; or · was in the process of being installed ready for use in your business; and the other asset is used in the same business, or is installed ready for use in the same business, for a reasonable time after it is acquired. The second requirement 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 happened. The second requirement can be satisfied by using another CGT asset for the required purpose even if you are not, nor have ever 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) 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) ; and · whether a CGT asset is used for the same or a similar purpose as another asset is a question of fact and degree. | Detailed Reasoning - Application to your facts: You owned an asset in the form of a commercial property which you used to produce rental income. You have received an amount of money as compensation for the disposal of the commercial property to an entity in circumstances meeting the conditions in paragraph 124-70(1)(c) and you state that you may incur expenditure to acquire a replacement asset in the form of a residential property. You will use the residential property to produce rental income for an indefinite period. Because you used the commercial property to produce rental income and you will use the residential property for the same purpose, the residential property will satisfy the same or similar purpose test required by subsection 124-75(4) for the purposes of the replacement asset roll-over.

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. | Relevant facts: You owned a commercial investment property which was the subject of resumption by a government department (department). | You had no intention of selling this property. You have advised that the disposal of the unit took place after the department served a notice on you. The notice invited you to negotiate with them with a view to them acquiring the property by agreement. The notice informed you that if the negotiations were unsuccessful, the property would be compulsorily acquired by the department. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.