Private ruling: CGT - compulsory acquisition rollover
Published: August 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: 1. Are you entitled to apply the rollover contained in subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain arising from the compulsory acquisition of a portion of your land by a state government department? | A3: No.

Relevant facts and circumstances: X Pty Ltd is the registered proprietor of a parcel of land (parcel 1). The land was purchased in 199X. The main roads department of your state will take a portion of it for a road reservation. The balance of the land will then be in two parcels. You will not dispose of the balance of the land. The land was initially purchased as a land bank investment. Several development options were considered however these were shelved due to the uncertainty of the eventual highway alignment reservation. You have two other parcels of land, parcel 2 was purchased in 199X. The land is currently being rezoned as industrial. You plan to develop commercial properties on the land for rental income on the appropriately zoned areas. You expect you will need to make some sales to be able to fund the project. Parcel 3 was purchased in 200X and is zoned residential. You plan to develop rental properties on the land for rental income. You plan that you will be involved in the project management of the development, the majority of the project will be subcontracted out. You state that you do not qualify as a small business entity for the purposes of the small business capital gains tax concessions.


Reasons for decision: Summary: Under the provisions of subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997), an entity may be able to choose to rollover 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) of the ITAA 1997). 'Australian government agency' is defined in subsection 995-1(1) of the ITAA 1997 as the Commonwealth, a State or Territory, or an authority of one of them. In this case, a portion of your land has been compulsorily acquired by a state government agency. Accordingly, subject to meeting the requirements of section 124-75 of the ITAA 1997, you will be entitled to apply the rollover contained in subdivision 124-B of the ITAA 1997. Further requirements of section 124-75 of the ITAA 1997 Depending on whether you receive money as a result of the compulsory acquisition or you receive another asset, there are additional requirements that must be met to apply the rollover under subdivision 124-B of the ITAA 1997. In cases where an entity receives money as a result of the event, the entity must satisfy the requirements of section 124-75 of the ITAA 1997 for the rollover 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) of the ITAA 1997, either of which can be satisfied: • if the original asset was used or installed ready for use in your business, the new asset must be used or installed ready for use in that same business for a reasonable time after it was acquired, or • you use the new asset for the same or similar purpose that the original asset was used for just before the CGT event that gave rise to the rollover. In your case You will receive money as compensation for the compulsorily acquired land, and you wish to use apply the rollover contained in 124-B of the ITAA 1997 to develop one of your other parcels of land or the residual land. Under property law, land and any improvements to that land (for example, a building or structure), are treated as part of the land and therefore treated as a single asset. Generally, only a building or structure built on land acquired before 20 September 1985 (pre-CGT land) will be taken to be a separate CGT asset from the land, where the construction is undertaken post-CGT. As all of your parcels of land, were purchased post-CGT, any building or development you do to the land will not be considered a separate CGT asset. Consequently, building or developing on any of your land with the compensation you receive from the compulsory acquisition would not satisfy the rollover conditions of sections 124-75 of the ITAA 1997 as you are not acquiring another CGT asset. Therefore, to be able to access the rollover, you will need to acquire a new CGT and use that new asset for the same or similar purpose that the original asset was used for.

2. Will you meet the compulsory acquisition rollover requirement if the compensation you received was used to develop another parcel of land that you own? | 3. Will you meet the compulsory acquisition rollover requirement if the compensation you received was used to develop the residual land?