Private ruling: CGT – Replacement asset rollover relief
Date of advice: 29 June 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018

Ruling: Q1: If the Taxpayer enters into an unconditional contract of sale of real estate for the purchase of a replacement asset and pays a deposit prior 30 June 2018, will the entire purchase price qualify for the rollover under Subdivision 124-B of Income Tax Assessment Act 1997 (ITAA 1997), all the other conditions being satisfied? | A1: Yes | Q2: If the Taxpayer acquires vacant land, will the vacant land satisfy the requirements under the first limb in subsection 124-75(4) of the ITAA 1997 if it is acquired for use in the Taxpayer’s commercial leasing business? | A2: Yes | Q3: If the Taxpayer acquires vacant land zoned commercial, residential or urban, that is not being used for any purpose for a reasonable amount of time after it is acquired, will the requirements of the second limb of subsection 124-75(4) of the ITAA 1997 be satisfied? | A3: Yes, if the land is acquired for future use in the Taxpayer’s commercial leasing business.

Relevant facts and circumstances: The Taxpayer is part of a group of entities. The Taxpayer is in the business commercial leasing. In 2011 an Australian government agency compulsory acquired vacant land from the Taxpayer. The compulsory acquired land formed a part of a large parcel of land that was acquired after September 1985. The Taxpayer obtained planning permits for a development. The Taxpayer completed Stage 1 of the development. The balance of the total parcel of land, of which the vacant land that was compulsorily acquired formed a part, was designated for future commercial leasing expansion. Although the Taxpayer intended to use the land for future commercial leasing expansion, at the time of the compulsory acquisition, there was no formal designation of the land for such purposes under planning permits etc. Compensation for the land was paid to the Taxpayer in 201X. Upon compulsory acquisition, the change in legal ownership of the Land in the year ended 30 June 201X resulted in the “happening” of CGT event A1. In relation to the capital gain derived by the Taxpayer under CGT event A1, the Taxpayer satisfied the requirements contained in section124‐70 of the ITAA 1997 for being eligible to choose CGT roll‐over relief. However, there has been a protracted legal dispute over the compensation for the land as the Taxpayer sought additional compensation for stamp duty costs. These proceedings were finalised in early in early 201X. The Taxpayer applied to the Commissioner for an extension of time under paragraph 124-75(3) of the ITAA 1997 for the Taxpayer to acquire a replacement asset for the land that was compulsory sold. An extension was granted until 30 June 201X. The size and magnitude of the replacement asset required for the rollover has impeded the Taxpayer in finding a replacement asset. The Taxpayer is uncertain as to what would be an acceptable acquisition as a replacement asset in this case and is therefore seeking advice around the category of asset that would satisfy the requirements of section 124-75 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-B | Income Tax Assessment Act 1997 subsection 124-70(1) | Income Tax Assessment Act 1997 paragraph 124-70(2)(a) | Income Tax Assessment Act 1997 subsection 124-75(1) | Income Tax Assessment Act 1997 subsection 124-75(2) | Income Tax Assessment Act 1997 subsection 124-75(3) | Income Tax Assessment Act 1997 paragraph 124-75(3)(b) | Income Tax Assessment Act 1997 subsection 124-75(4) | Income Tax Assessment Act 1997 subsection 124-75(5) | Income Tax Assessment Act 1997 subsection 124-75(6)

Reasons for decision: Detailed Reasoning - Detailed Reasoning: All legislative references are to 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. Subsection 124-70(1) states that 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(2)(a) requires the compensation for the CGT event to be money or another CGT asset or both. Section 124-75 lists other requirements in order to receive roll-over relief if the compensation is money: ● Subsection 124-75(1) states if you receive money for the event happening, you can choose to obtain role-over relief only if these requirements are satisfied. ● Subsection 124-75(2) states that you must incur expenditure in acquiring another CGT asset (except a depreciating asset whose decline is worked out under Division 40 or deductions for which are calculated under Division 328.) Taxation Determination TD 2000/39 deals with the meaning “incur” in subsection 124-75(2) and states, in relation to expenditure in acquiring a CGT asset, that you: (a) outlay expenditure; or (b) have definitively committed yourself, or have completely subjected yourself, to a presently existing liability to outlay the expenditure Subsection 124-75(3) states the following: At least some of the expenditure must be incurred: (c) no earlier than one year, or within such further time as the Commissioner allows within special circumstances, before the even happens; or (d) no later than one year, or within such further time as the Commissioner allows within special circumstances, after the end of the income year in which the event happens. The Commissioner has exercised his discretion in accordance with paragraph 124-75(3)(b) to extend the period in which to obtain a replacement asset until 30 June 201X. Therefore, if you enter into an unconditional contract of sale of real estate for the purchase of a replacement asset and pay a deposit prior to 30 June 201X, the entire purchase price will qualify for the rollover under subdivision 124-B, if all the other conditions are satisfied. | Detailed Reasoning - Question 2: If the Taxpayer acquires vacant land, will the vacant land satisfy the requirements under the first limb in subsection 124-75(4) of the ITAA 1997 if it is acquired for use in the Taxpayer’s commercial leasing business? | Detailed Reasoning - Answer: Yes | Detailed Reasoning - Detailed Reasoning: If you receive money as a result of your asset being compulsorily acquired by an Australian government agency and you acquire another asset, rollover relief is subject to special rules as set out in subsections 124-75(4) to 124-75(6): ● the replacement asset must be either − used in the same business that the original asset was used in just prior to the compulsory acquisition for a reasonable time after you acquire it; or − be used for the same or similar purpose as the original asset for a reasonable time after you acquire it (subsection 124-75(4)) ● the replacement asset cannot become an item of your trading stock just after you acquire it nor can it be a depreciating asset (subsection 124-75(5)); and ● the replacement asset cannot become a registered emissions unit of yours just after you acquire it (subsection 124-75(6)) after the end of the income year in which the event happened. Either of the two further requirements in subsection 124-75(4) can be satisfied. The requirement that applies to this case is the “same or similar purpose” test. This test is satisfied if you use the other asset for a reasonable time after you acquire 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. 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. In your case, the Australian government agency has compulsorily acquired a block of vacant land that you held with the intention to use the land in your commercial leasing business. The same or similar purpose test contained in subsection 124-75(4) will be satisfied where the replacement asset is vacant land that is to be used in your commercial leasing business. | Detailed Reasoning - Question 3: If the Taxpayer acquires vacant land zoned commercial, residential or urban, that is not being used for any purpose for a reasonable amount of time after it is acquired, will the requirements of the second limb of subsection 124-75(4) be satisfied? | Detailed Reasoning - Answer: Yes, if the land is acquired and held for a reasonable period of time for future use in the Taxpayer’s commercial leasing business. | Detailed Reasoning - Detailed reasoning: As referred to in the reasoning for question 2, “the same of similar purpose” test must be satisfied and whether a CGT asset is used for the same or a similar purpose as another asset is a question of fact and degree. ATO ID 2003/127 deals with a situation where the land being compulsory acquired was not used by the taxpayer in carrying on a business and states the following: Where the original asset was not in any way connected to a business being carried on by the taxpayer , the replacement asset must be used (for a reasonable period after it is acquired) for the same purpose, or for a similar purpose, to the purpose for which the original asset was used just before the event happened…… In the present circumstances, the taxpayer’s original land was not used for any purpose immediately before the compulsory acquisition. The requirement in subsection 124-75(4) of the ITAA 1997 will therefore be satisfied if the taxpayer uses the money to acquire another vacant block of land. The potential use to which the land could be put to use is not relevant.[Emphasis added] However the present circumstances are differentiated from those in ATO ID 2003/127 by the fact that the original asset was connected to a business being carried on by the Taxpayer. The land was held with the intention of future use in the Taxpayer’s commercial leasing business. Regardless of the zoning of the land at the time of acquisition, if vacant land is acquired and not used for any purpose for a reasonable time, but similar to the land that was compulsory acquired, it is intended to be used in the Taxpayer’s commercial leasing business, the requirements of subsection 124-75(4) will be satisfied.

Question 1: If the Taxpayer enters into an unconditional contract of sale of real estate for the purchase of a replacement asset and pays a deposit prior 30 June 2018, will the entire purchase price qualify for the rollover under Subdivision 124-B of ITAA 1997, all the other conditions being satisfied?