Private ruling: Capital gains tax - main residence exemption and replacement asset roll-over
Date of advice: 26 April 2017
Published: June 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015


Relevant facts and circumstances: You purchased a 2.XX hectare property (Property A) in June 19XX with a calculated cost base of $XXXX. You received an acquisition notice from the Council (the Council) on 20XX that your property was to be acquired. The notice set out that if negotiations were unsuccessful, the property would be compulsorily acquired. Negotiations over the price to be received for Property A commenced in 20XX and finalised in 20XX when it was acquired by the Council for $XXXX. You contracted for Property B (the replacement property) in 20XX, which settled in 20XX for $XXXX. The expenditure to purchase Property B was incurred less than one year before settlement of Property A. You purchased Property B to replace Property A and for the purpose of being your main residence. You have calculated your assessable capital gain after the application of the main residence exemption to be $XXXX (on the excess above 2 hectares).

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 section 124-75 | Income Tax Assessment Act 1997 section 124-85 | Income Tax Assessment Act 1997 subsection 124-85(2)

Reasons for decision: Summary: Are you eligible to reduce the capital gain made from the disposal of Property A under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997)? No. Are you required to reduce the cost base of the replacement property (Property B) under Subdivision 124-B of the ITAA 1997? No. | Detailed Reasoning - This ruling applies for the following period(s): Year ending 30 June 2016 | Detailed Reasoning - The scheme commences on: 1 July 2015 | Detailed Reasoning - Relevant facts and circumstances: You purchased a 2.XX hectare property (Property A) in June 19XX with a calculated cost base of $XXXX. You received an acquisition notice from the Council (the Council) on 20XX that your property was to be acquired. The notice set out that if negotiations were unsuccessful, the property would be compulsorily acquired. Negotiations over the price to be received for Property A commenced in 20XX and finalised in 20XX when it was acquired by the Council for $XXXX. You contracted for Property B (the replacement property) in 20XX, which settled in 20XX for $XXXX. The expenditure to purchase Property B was incurred less than one year before settlement of Property A. You purchased Property B to replace Property A and for the purpose of being your main residence. You have calculated your assessable capital gain after the application of the main residence exemption to be $XXXX (on the excess above 2 hectares). | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 Subdivision 118-B Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 118-120 Income Tax Assessment Act 1997 Subdivision 124-B Income Tax Assessment Act 1997 section 124-70 Income Tax Assessment Act 1997 section 124-75 Income Tax Assessment Act 1997 section 124-85 Income Tax Assessment Act 1997 subsection 124-85(2) | Detailed Reasoning - Capital gains tax (CGT): You make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else, as detailed in section 104-10 of the ITAA 1997. CGT assets include real estate acquired on or after 20 September 1985. | Detailed Reasoning - Main residence exemption: Section 118-110 of the ITAA 1997 provides that you can generally ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence. To be eligible for the full exemption: - the dwelling must have been your home for the whole time you owned it, - you must not have used the dwelling to produce assessable income, and - any land on which the dwelling is situated must be 2 hectares or less. | Detailed Reasoning - Main residence on land of more than 2 hectares: Section 118-120 of the ITAA 1997 provides that the main residence exemption only extends to the dwelling plus two hectares of adjacent land. Any land that exceeds two hectares will therefore be subject to capital gains tax provisions. If the land area surrounding a dwelling that is your main residence is greater than 2 hectares, you may choose which particular part of the land is covered by the main residence exemption. If the area of land you select can be separately valued, you calculate your capital gain or loss on the remainder of the land by apportioning the capital proceeds and the cost base on the basis of the valuation. If the area of land you select cannot be separately valued, you may calculate your capital gain or loss on the remainder of the land by apportioning the capital proceeds and the cost base on an area basis. The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances | Detailed Reasoning - Replacement asset roll-overs: Section 124-70 of the ITAA 1997 provides that you may choose a roll-over if a CGT asset that they own is compulsorily acquired by an Australian Government Agency. Subsection 124-70(1) of the ITAA 1997 provides that you may be able to choose a roll-over if a certain event happens to your CGT asset. Paragraph 124-70(1)(c) of the ITAA 1997 provides that where the following conditions are met, a roll-over event will have happened to the CGT asset: (i) the disposal takes place after a notice was served; (ii) the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement; (iii) the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity; (iv) the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under section (1A); Subsection 124-70(1A) of the ITAA 1997 provides that a law is covered under this subsection if it is an Australian law, other than Chapter 6A of the Corporations Act 2001 . Subsection 124-70(2) of the ITAA 1997 provides that you must receive either money or another CGT asset or both as compensation for the CGT event happening. If you receive money for the acquisition occurring, then section 124-75 of the ITAA 1997 provides for requirements before a rollover can be chosen. You must incur expenses acquiring another CGT asset. At least some of the expenditure must be incurred no more than 12 months before the acquisition occurs, unless the Commissioner allows in special circumstances. Alternatively, you must have incurred the expenditure no later than one year after the end of the income year in which the CGT asset was acquired. You must also use the replacement that was purchased for the same purpose for a reasonable time after you acquired it. A capital gain that you make due to a compulsory acquisition may be reduced, not reduced, or completely disregarded, depending upon the criteria found in section 124-85 of the ITAA 1997. There may also be consequences in relation to the cost base of the replacement asset. There are several key terms in the section: - Money – being the proceeds of sale from the acquisition; - Expenditure – being the cost to purchase the replacement asset; - Excess – being the money received minus the expenditure. If the ‘money’ exceeds the ‘expenditure’ and the gain is less than or equal to the ‘excess’, then the gain is not reduced and there will be no adjustment to the cost base of your replacement asset (as per item 2 of the table in subsection 124-85(2) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: Property A was a single title of 2.XX hectares in size and your main residence for the duration of your ownership interest. Under section 118-120 of the ITAA 1997 the gain or loss from up to 2 hectares of your main residence is disregarded. You were served an acquisition notice by the Council to acquire Property A in 20XX. You negotiated with the Council from 20XX to 20XX when your ownership interest in Property A was disposed of to the Council for $XXXX. You contracted for Property B, which was to be used as your main residence in place of Property A, in 20XX. The contract to purchase then settled in 20XX for $XXXX. The expenditure to purchase the replacement property was incurred less than one year before settlement on Property A, as per section 124-75 of the ITAA 1997. The key phrases under subsection 124-85(2) of the ITAA 1997 in your case are: - Money – being the proceeds from acquisition - $XXXX; - Expenditure – being the cost to purchase the replacement asset - $XXXX; - Excess – being the money received minus the expenditure - $XXXX - $XXXX = $XXXX. The main residence CGT exemption is applied to the gross capital gain, before the roll-over under section 124-85 of the ITAA 1997. It does not affect the amount of money or expenditure that is used to complete the calculations. However, the application of the main residence exemption has the effect that the calculable gain for the roll-over is the lesser amount, being $XXXX. In your circumstances, the ‘money’ you have received exceeds the ‘expenditure’; and the gain is less than the ‘excess’. The effect of these circumstances under subsection 124-85(2) of the ITAA 1997 is that the gain is not reduced. Subsequently, there will be no adjustment to the cost base of your replacement asset, Property B.