Private ruling: Capital gains tax - replacement asset rollover
Published: April 2014
Ruling period: Year ending 30 June 2015.
Date scheme commenced: 1 July 2012.

Ruling: Q1: Is the insurance payment for loss and destruction of your investment property assessable under the capital gains tax (CGT) provisions? | A1: Yes. | Q2: Are you entitled to defer any capital gain until you dispose of your replacement investment property under the replacement asset rollover provisions? | A2: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own an investment property. Approximately 18 months ago the investment property was destroyed by fire. The investment property is located in a high fire bushfire zone. You negotiated with your insurance company for a period in relation to the payment of compensation. The compensation payment was received approximately 12 months ago. The process of obtaining the appropriate planning and building approvals was very lengthy and difficult. It has taken a year to have all the relevant authorities to give the green light to proceed with the construction of a dwelling. The rebuilding involved cutting down some trees, road building, major electrical, plumbing and earthworks. You are now at the stage of having the building drainage amended and then submission for final approval. The construction of your replacement investment property will be completed by a specified date.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-20 | Income Tax Assessment Act 1997 Section 124-70 | Income Tax Assessment Act 1997 Section 127-75

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Loss or destruction of an asset: CGT event C1 occurs if a CGT asset owned by an individual is lost or destroyed. The time of the event is when compensation for the loss or destruction is first received. A capital gain is made if the compensation amount is more than the asset's cost base or a capital loss is made if the compensation amount is less than the asset's reduced cost base. You may be able to obtain a rollover after an asset is lost or destroyed. You must receive money or another CGT asset or both as compensation for the event or under an insurance policy against the risk of loss or destruction of the asset. As your original investment property was destroyed and you received money for the event happening from an insurance policy, you may have the option of choosing rollover. You may choose rollover if: • you incur expenditure in acquiring another CGT asset, or • part of the original asset is lost or destroyed and you incur expenditure of a capital nature in repairing or restoring it. You are required to use the replacement asset for a reasonable time after you acquire it, for the same purpose as the original asset. Taxation Determination TD 2000/40 (enclosed) provides guidance on what are special circumstances. The special circumstances are to be examined based on the facts of the specific case. In determining if the discretion would be exercised the Commissioner has considered the following factors: • evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension • any prejudice to the Commissioner which may result from the additional time being allowed, however, the mere absence of prejudice is not enough to justify the granting of an extension • any unsettling of people, other than the Commissioner, or of established practices • consideration of fairness to people in like positions and the wide public interest • whether there is any mischief involved, and • a consideration of the consequences | Detailed Reasoning - Are you entitled to rollover relief?: Rollover relief may be available if an insurance payment is received for the loss or destruction of an asset. In the case of an asset acquired after 20 September 1985, the provisions allow deferment of any capital gain until such time as there is a disposal of the replacement asset. In your case, the replacement asset will be the investment property which you intend to build. However, there are conditions that must also be satisfied, for rollover relief to be available, if money is received. An individual must incur expenditure in acquiring another asset or repair or restore the original asset no later than one year after the end of the income year in which the money is received or until such time as the Commissioner allows in special circumstances. The replacement asset must be used for the same or similar purpose as the original asset, for example, if the original asset was used for rental purposes, then the new asset must also be used for rental purposes. If the replacement asset is not acquired, a capital gain or capital loss must be declared in the income year in which the insurance payment is received. In your case, you owned an investment property which was destroyed by a bushfire. You received an insurance payout for the destruction of the investment property approximately 12 months ago, in the relevant income tax year. You will incur expenditure to build a replacement asset in the form of a dwelling to produce rental income. The completion date of total expenditure for the new investment property will be finalised by a specified date. Based on the information you have provided you are entitled to rollover relief and you can defer any capital gain or capital loss until there is a disposal of your new investment property.