Private ruling: Income tax - CGT - rollover
Date of advice: 3 July 2020
Published: August 2020
Ruling period: 30 June 20XX | 30 June 20XX | 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion available under subsection 124-75(3) of the Income Tax Assessment Act 1997 to allow you further time until 30 June 2021 to incur expenditure in acquiring a replacement CGT asset following the compulsory acquisition of your original CGT asset? | A1: Yes

Relevant facts and circumstances: You jointly owned a rental property (apartments) with your spouse and two children. The property was situated at Suburb A. You and your spouse each held a percentage interest in the property. This property provided you with additional income in retirement. On XX/XX/XXXX, the property was compulsorily acquired by the Government for $X,XXX,XXX. After repayment of the mortgage, you and your spouse received approximately $XXX,XXX from this investment. Your children were able to purchase replacement assets. You intended to elect the CGT roll-over relief with respect to the compulsory acquisition by purchasing a replacement CGT asset of sufficient value to cover the proceeds received. On XX/XX/XXXX you entered into a contract for a property situated in Suburb B for $X,XXX,XXX. This contact was terminated X days later due to finance being denied. You are actively attempting to secure a new asset however have been restricted by both finance and COVID19. You intend on purchasing another block of apartments as you have calculated a return of 7% compared with 2% you predict you will receive if you purchase a house.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 section 124-75 Reason for decision | If a change of ownership triggers Capital Gains Tax (CGT) event A1 as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition, subsection 104-10(6) of the ITAA 1997 provides that the time of the event is the earliest of when compensation is received or when the change of ownership of an asset occurs. | Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met. | Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency. | Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory. | A replacement asset roll-over allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. | A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for a rollover (subsection 124-70(2) of the ITAA 1997). Should the owner of the original asset receive money, section 124-75 of the ITAA 1997 then provides further requirements which must be satisfied if only money is received for the event happening. | Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) of the ITAA 1997 requires the entity to incur at least some of the expenditure in acquiring this replacement CGT asset no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens. | In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what could be considered 'special circumstances'. | TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case. | In determining whether the discretion will be exercised, the Commissioner also considers the following factors: | · there should be evidence of an acceptable explanation for the period of the extension requested and that it would be fair and equitable in the circumstances to provide such an extension | · account must be had to 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 | · account must be had of any unsettling of people, other than the Commissioner, or of established practices | · there must be a consideration of fairness to people in like positions and the wider public interest | · whether there is any mischief involved, and | · a consideration of the consequences. | Your property was acquired by the government in order to convert the site for public use. You owned this property with your spouse and children. The ownership interest included a joint 33% share held with your spouse and a 33% share with each of your two children. | You are retired and relied on the revenue from this property to supplement your income. The government paid $X/XXX/XXX for this property. You and your spouse had claim to one third of this property. After paying out the existing mortgage of you and your spouse received approximately $XXX/XXX. | You have advised us that in order to replace the asset with one that would yield the return the previous asset supplied; you will need to purchase multiple apartments. You have identified that you believe the yield on an apartment is approximately 7% compared with a 2% return you would receive if you purchased a regular home. | You and your spouse signed a contract to purchase a block of apartments on XX/XX/2020 for $X,XXX,XXX in Suburb B however the bank denied your finance request. You have also sited issues with purchasing a property due to the recent Covid19 pandemic. | You are of the view that your age may be preventing you from acquiring finance and are unsure if you will be able to acquire a replacement asset. | Accordingly, you have requested the Commissioner's discretion to allow an extension of time in accordance with paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement asset as you have not been able to find a suitable replacement asset in time. | Based on the above facts, it is concluded that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset. It would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay. | Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow the company an extension to obtain a replacement asset for property that was compulsorily acquired by an Australian government agency until 30 June 2021.

Reasons for decision: Summary: If a change of ownership triggers Capital Gains Tax (CGT) event A1 as a result of acquisition of a CGT asset by another entity under a power of compulsory acquisition, subsection 104-10(6) of the ITAA 1997 provides that the time of the event is the earliest of when compensation is received or when the change of ownership of an asset occurs. Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B of the ITAA 1997 are met. Under subsection 124-70(1) of the ITAA 1997, an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency. Subsection 995-1(1) of the ITAA 1997 defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory. A replacement asset roll-over allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for a rollover (subsection 124-70(2) of the ITAA 1997). Should the owner of the original asset receive money, section 124-75 of the ITAA 1997 then provides further requirements which must be satisfied if only money is received for the event happening. Subsection 124-75(2) of the ITAA 1997 requires that the owner of the asset must incur expenditure in acquiring another CGT asset. Paragraph 124-75(3)(b) of the ITAA 1997 requires the entity to incur at least some of the expenditure in acquiring this replacement CGT asset no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income year in which the event happens. In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? provides guidance on interpreting subsection 124-75(3) of the ITAA 1997, in particular what could be considered 'special circumstances'. TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case. In determining whether the discretion will be exercised, the Commissioner also considers the following factors: · there should be evidence of an acceptable explanation for the period of the extension requested and that it would be fair and equitable in the circumstances to provide such an extension · account must be had to 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 · account must be had of any unsettling of people, other than the Commissioner, or of established practices · there must be a consideration of fairness to people in like positions and the wider public interest · whether there is any mischief involved, and · a consideration of the consequences. Your property was acquired by the government in order to convert the site for public use. You owned this property with your spouse and children. The ownership interest included a joint 33% share held with your spouse and a 33% share with each of your two children. You are retired and relied on the revenue from this property to supplement your income. The government paid $X/XXX/XXX for this property. You and your spouse had claim to one third of this property. After paying out the existing mortgage of you and your spouse received approximately $XXX/XXX. You have advised us that in order to replace the asset with one that would yield the return the previous asset supplied; you will need to purchase multiple apartments. You have identified that you believe the yield on an apartment is approximately 7% compared with a 2% return you would receive if you purchased a regular home. You and your spouse signed a contract to purchase a block of apartments on XX/XX/2020 for $X,XXX,XXX in Suburb B however the bank denied your finance request. You have also sited issues with purchasing a property due to the recent Covid19 pandemic. You are of the view that your age may be preventing you from acquiring finance and are unsure if you will be able to acquire a replacement asset. Accordingly, you have requested the Commissioner's discretion to allow an extension of time in accordance with paragraph 124-75(3)(b) of the ITAA 1997 to acquire a replacement asset as you have not been able to find a suitable replacement asset in time. Based on the above facts, it is concluded that special circumstances exist to warrant the Commissioner to exercise his discretion and allow an extension of time to obtain a replacement asset. It would be fair and equitable to do so given that the circumstances represent an acceptable explanation for the delay. Therefore, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 to allow the company an extension to obtain a replacement asset for property that was compulsorily acquired by an Australian government agency until 30 June 2021.