Private ruling: Replacement-asset roll-over
Published: April 2014
Ruling period: 1 July 2013 to the date when the taxpayer acquires the replacement asset under subsection 124-75(3)
Date scheme commenced: It has already commenced

Ruling: Q1: Is roll-over relief under Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) available to the taxpayer for the 'loss and destruction' of its rights to ownership and use of the subject land? | A1: Yes | Q2: For the purposes of subsection 124-75(3) of the ITAA 1997, when did the CGT event happen which gave rise to the loss and destruction of the taxpayer's rights to ownership and use of the subject land? | A2: The CGT event C1 happened on the day when the taxpayer first received compensation for the loss or destruction of the asset. | Q3: Will the Commissioner exercise his discretion under subsection 124-75(3) of the ITAA 1997 to allow the taxpayer a period of two years from the date of the compensation payment in which to acquire a replacement asset? | A3: Yes

Relevant facts and circumstances: The taxpayer acquired a block of land ('the original land') some years ago. The land was, and still is, undeveloped land. The land was later rezoned and reserved as 'Parks and Recreation' under a government scheme ('the scheme'). The land was acquired by the taxpayer for the purposes of holding it long term and to develop at a later date as a lifestyle property, for example, a house and hobby farm. Both before and after the rezoning, the taxpayer's primary purpose for holding the land to develop it as a lifestyle property remained unchanged. Even after the rezoning, the taxpayer was hopeful that it would be able to undertake some limited development so as to allow it to make use of the land. The taxpayer was entitled to obtain compensation from the government body due to injurious affection of the land as a result of it being reserved as parks and recreation under the planning scheme. However, no compensation is payable until the government body refuses an application made under the scheme for approval to develop the land. The taxpayer applied to the government body to develop the land for a single dwelling and its application was refused. The government body's refusal to grant development approval entitled the taxpayer to compensation. The matter was referred to arbitration and the valuers on both sides agreed that the reservation had so affected the value of the land that its residual value, in its affected stated, was nil. A memorandum of settlement ('settlement') was signed by the taxpayer and the government body. The settlement required the government body to pay compensation to the taxpayer, and required the taxpayer to transfer the land to the government body for a nominal amount. The compensation claim was finalised when the taxpayer received the payment and the land was transferred in accordance with the terms of the settlement on or around the same date. The compensation claim did not provide authority for the government body to compulsorily acquire land and does not require the taxpayer to transfer the land to it. The government body did not, and had never sought to, compulsorily acquire the land. It did not, despite having an opportunity to do so, elect to purchase the land following receipt of the claim for compensation. Assumption(s) The taxpayer has satisfied all the relevant conditions in Subdivision 124-B of the ITAA 1997

Relevant legislative provisions: Income Tax Assessment Act 1997 : subsection 124-70(1) | : subsection 124-70(2) | : subsection 104-20(1) | : section 124-75 | : section 124-85 | : section 104-20

Reasons for decision: Summary: Subdivision 124-B provides that a replacement asset roll-over may be available to a taxpayer if one of the following involuntary disposal events in subsection 124-70(1) happens to a GCT asset the taxpayer owns (the original asset): (a) it is compulsorily *acquired by an *Australian government agency; (aa) it is compulsorily acquired by an entity (other than an Australian government agency or a *foreign government agency) under a power of compulsory acquisition conferred by a law covered under subsection (1A); (b) it, or part of it, is lost or destroyed; (c) you *dispose of it to an entity (other than a foreign government agency) in circumstances meeting all of these conditions: (i) the disposal takes place after a notice was served on you by or on behalf of the entity; (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 subsection (1A); (ca) you dispose of it to an entity (other than a foreign government agency) in circumstances meeting all of these conditions: (i) the asset is land over which a mining lease was compulsorily granted …… (d) if it is a lease granted to you by an *Australian government agency under an *Australian law - the lease expires and is not renewed. Where one of these listed events happens, the taxpayer must receive money or another CGT asset or both as compensation for the CGT event happening or under an insurance policy against loss of the original asset: subsection 124-70(2). If the taxpayer receives money as compensation or as an insurance payment, the conditions in section 124-75 must also be satisfied for the roll-over relief to apply: • paragraph 124-75(2)(a) - the taxpayer must incur expenditure in acquiring another CGT asset; and • paragraph 124-75(3)(b) - at least some of the expenditure must be incurred no later than one year after the end of the income year in which the event occurred or within such a time as the Commissioner allows in special circumstances. In addition, the replacement asset must be used, or installed ready for use in the business, for a reasonable time after it is acquired by the taxpayer. Otherwise the taxpayer must use the replacement asset for the same or similar purpose for which the original asset was used just before the CGT event happened: subsection 124-75(4). | Detailed Reasoning - One of the events in subsection 124-70(1) must happen to a GCT asset the taxpayer owns: Although the original land was transferred to the government body for a nominal value, the transfer was not a determinative factor in the taxpayer's entitlement to compensation. The entitlement was not affected regardless of whether the land was transferred or sold to the government body by separate voluntary agreement. The underlying asset that gave rise to the compensation is therefore not a disposal of a CGT asset under CGT event A1. The land was not compulsorily acquired by an Australian government agency or by an entity under a power of compulsory acquisition conferred by a law covered under subsection 124-70(1A). The compensation claim did not provide authority for the government body (nor did the government body ever seek) to compulsorily acquire the land. Accordingly, paragraph 124-70(1)(b) - loss or destruction of a CGT asset or part of it - is the relevant provision which could be applicable in the taxpayer's circumstances. Ownership of an asset confers various rights to the holder. It encompasses legal title as well as entitlements to the use and enjoyment of the asset. When the original land was rezoned and reserved from 'Rural' to 'Parks and Recreation', the reservation had so affected the land that its residual value was reduced to nil and the tapxyaer's intended use of the land was also severely restricted, notwithstanding the fact that the land had remained intact physically. The taxpayer's right to compensation arose when the government body refused its application to develop the land. This right was directly attributable to the rezoning which led to injurious affection on the taxpayer's rights to use, develop and enjoy the land as intended. Accordingly, the taxpayer has satisfied the prerequisite for the roll-over relief in Subdivision 124-B. Following is an examination of each of the relevant conditions in Subdivision 124-B as against the taxpayer's circumstances: | Detailed Reasoning - The taxpayer must receive money or another CGT asset or both as compensation: paragraph 124-70(2)(a): The taxpayer has received monetary compensation for the CGT event happening and therefore it has satisfied this criterion. | Detailed Reasoning - The taxpayer must incur expenditure in acquiring another CGT: paragraph 124-75(2)(a): The taxpayer is seeking to acquire a replacement block of land. | Detailed Reasoning - Timing of the expenditure: paragraph 124-75(3)(b): The third condition includes the requirement that the taxpayer incur the expenditure on the replacement asset or starts to "hold" the replacement asset no later than one year after the end of the income year in which the disposal occurred. The Commissioner can exercise his discretion to allow a longer period on the basis that special circumstances exist. When a CGT asset is lost or destroyed, it gives rise to CGT event C1. Paragraph 104-20(2)(a) provides that CGT event C1 happens when the taxpayer first receives compensation for the loss or destruction. The taxpayer has requested that the Commissioner agree to extend this time limit by another six weeks due to special circumstances. As pointed out in 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? the expression 'special circumstances', by its nature, is incapable of a precise or exhaustive definition. This will depend on the facts of each particular case. Instead, TD 2000/40 provides some examples to illustrate the application of the expression. The taxpayer claims that it is very difficult to find a replacement asset as there are not many properties in the same area with similar characteristics to the original land and that it has had a protracted dispute with the government body in relation to its right to compensation and the quantum of the compensation. In deciding whether to exercise his discretion, the Commissioner would generally consider the following factors: • there should be evidence of an acceptable explanation for the period of time requested; • any prejudice to the Commissioner which may result from the additional time being allowed; • any unsettling of people, other than the Commissioner, or of established practices; • consideration of fairness between the taxpayer and other people in like positions and the wider public interest; • whether there was any mischief involved; and • consideration of the consequences. The 12 month period to acquire a replacement asset under subsection 124-75(3) starts from the date when the compensation is first received, not when the negotiation for compensation commenced. The delay in coming to a settlement with the government body is irrelevant in determining whether special circumstances exist. However, we accept the taxpayer's assertions that the timeframe in which real estate is bought and sold is significantly longer than most other assets for which roll-over is often claimed (for example plant and equipment), and there is a scarcity of available land in the area. It is also noted that the taxpayer has requested to extend the time limit by a mere six weeks and not for a prolonged period. Having considered the relevant factors against the taxpayer's circumstances, the Commissioner is satisfied that it is fair and equitable to extend the period by another six weeks as requested for the taxpayer to incur at least some of the expenditure in connection with acquiring a replacement asset. Use of the replacement asset: subsection 124-75(4). There are additional rules that must be satisfied under subsection 124-75(4) if the taxpayer acquires a replacement CGT asset. The two requirements are that either: 1. the original asset was used in the taxpayer's business (the business asset test), or 2. the replacement asset is used for a reasonable period after acquisition for the same or similar purpose as the original asset (the same or similar purpose test). The second requirement can be satisfied by using another CGT asset for the required purpose even if the taxpayer has not, nor has ever been, carrying on business. The original land has never been used in the taxpayer's business. The land was intended to be held long term and developed at a later date for lifestyle purposes such as a house and hobby farm. The second requirement is therefore the relevant test. As the taxpayer is seeking to acquire another block of land which will be used for the same purpose as the original land, this test is satisfied. | Detailed Reasoning - Conclusion: On the basis that the taxpayer has satisfied all the relevant conditions, it will be entitled to the roll-over relief under Subdivision 124-B. | Detailed Reasoning - Question 2: The CGT event happened when the taxpayer first received the compensation payment. Refer to Question 1 for an explanation of the reasoning | Detailed Reasoning - Question 3: The Commissioner will exercise his discretion under subsection 124-75(3) to allow the taxpayer to acquire a replacement asset on or before the date the taxpayer has requested. Refer to Question 1 for an explanation of the reasoning | Detailed Reasoning - General Guidance: The taxpayer has also requested guidance on the following questions: | Detailed Reasoning - Question 4(a): To what extent does the replacement land have to be the same or similar size, value and distance from the same area as the original land? | Detailed Reasoning - Question 4(b): Does the replacement land have to be entirely owned by the taxpayer? | Detailed Reasoning - Question 4(c): Can the Commissioner confirm that the intended purpose and potential use of the original land and replacement land is not relevant for the purposes of subsection 124-75(4) of the ITAA 1997? The following advice is given for guidance only. It does not form part of the private ruling decision: | Detailed Reasoning - Question 4(a): Subdivision 124-B allows a taxpayer who has satisfied all the conditions set out in the provision to defer the making of a capital gain arising from the loss or destruction of a CGT asset. The minimum requirement is to acquire another CGT asset. There is no reason, however, why the taxpayer cannot acquire more than one asset to replace the original asset, provided that they each satisfy the relevant requirements of Subdivision 124-B: Paragraph 13 of Taxation Determination TD 2000/41 Income tax: capital gains: are the two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 for a CGT asset acquired to replace an original asset alternative and mutually exclusive requirements? Thus, if the taxpayer is unable to find a block of land which can be used for the same or similar purpose as the original land, for example, the size of the replacement land is so limited that it is unable to accommodate a private residence as well as a hobby farm, the taxpayer could acquire two separate pieces of land, whether in juxtaposition, in close proximity or further apart, and would still be eligible for the roll-over provided all the relevant conditions in Subdivision 124-B are satisfied. However, as the taxpayer has received money for the CGT event happening, the following rules in section 124-85 are relevant in considering the extent to which the replacement land has to be of the same or similar size, value and distance from the same area as the original land: (1) If the money received exceeds the cost of the replacement asset and the capital gain is greater than the excess - the capital gain is reduced to the amount of that excess and the cost base of the replacement asset is reduced by the remainder of the capital gain. (2) If the money received exceeds the cost of the replacement asset and the capital gain is less than or equal to the excess - there is no reduction in the capital gain, that is, there is no roll-over. (3) If the money received does not exceed the cost of the replacement asset - the capital gain is disregarded and the cost base of the replacement asset is reduced by the amount of the capital gain. In summary, there is no restriction in respect of the size, value and distance/location of the replacement land. | Detailed Reasoning - Question 4(b): The replacement land does not have to be entirely owned by the taxpayer. If the taxpayer acquires the land with another party as tenants in common, each entity would hold their respective interest in the replacement land independently with their own rights and obligations. At its base level, the tenancy would be similar to that of a partnership in terms of ownership of the asset and guidance is drawn from the principles applicable to a partnership. The tests which determine eligibility for the roll-over under Subdivision 124-B apply at the partner level, not the level of the partnership. In Taxation Determination TD 2000/43 Income tax: capital gains: if a CGT asset is owned by partners in partnership, how do the replacement asset tests in Subdivision 124-B of the Income Tax Assessment Act 1997 apply? it is stated that an interest in an asset of a partnership is itself a CGT asset and each individual partner's interest in each asset of the partnership is the relevant CGT asset for a roll-over under Subdivision 124-B. It is further stated that each individual partner needs to satisfy the tests for their particular interest in each CGT asset of the partnership to qualify for a roll-over under Subdivision 124-B. Since each individual partner's interest in each partnership asset is itself a relevant CGT asset for Subdivision 124-B purposes, it follows that if the taxpayer acquires the replacement land as a tenant in common, its total contributions would represent its share of interest in the tenancy. Thus, if the taxpayer spends the whole compensation amlunt towards the cost of the replacement land, that amount will be the taxpayer's proportionate interest in the CGT asset. There is nothing to prevent the taxpayer from spending more or less than the amount of monetary compensation it has received and, consequently, a higher or lower percentage interest in the asset. However, the taxpayer may need to consider the CGT consequences discussed in Question 4(a) above. | Detailed Reasoning - Question 4(c): The acquisition of a replacement asset will qualify under section 124-75 if the taxpayer uses it for a reasonable time thereafter for the same or a similar purpose as the original asset before the CGT event happening. It is not relevant, under this test, to have regard to the potential use to which either the original or replacement asset could be put. In the case highlighted in ATO Interpretative Determination ATO ID 2003/127 income tax: Capital gains tax: replacement asset roll-over - compulsory acquisition, loss or destruction of original asset , the land, which was subject to a Council restriction on its use, had not been used by the taxpayer in carrying on a business before its compulsory acquisition. The replacement block of land was not subject to the same Council restriction as the original asset. The Commissioner considers that as the original land was not being used for any purpose immediately before the compulsory acquisition and the replacement land is not used for any purpose for a reasonable period after it is acquired, the requirements in subsection 124-75(4) is satisfied. The potential use to which the replacement land could be put or the intended use of the land is not relevant. The situation in the taxpayer's case is similar. The original asset was a block of undeveloped land which had never been put to any use. Therefore, the intended purpose and potential use of the replacement land will not be relevant factors for the purposes of subsection 124-75(4).

All legislative references are to the ITAA 1997 unless otherwise specified