Capital gains tax: replacement asset roll-over - compulsory acquisition, loss or destruction of original asset

In determining for the purpose of subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997) whether a replacement block of vacant land is used for the same or a similar purpose as an original block of vacant land, is it relevant to have regard to the potential use to which either block can be put?

No. If the original land was not being used for any purpose prior to its compulsory acquisition and the replacement land is not used for any purpose for a reasonable period after it is acquired, it is considered that the requirements in subsection 124-75(4) of the ITAA 1997 will be satisfied. It is not relevant to have regard to the potential use to which the land could be put.

The taxpayer owned a block of land acquired after 19 September 1985. The land was subject to a Council restriction on its use. The land was not used by the taxpayer in carrying on a business.

The land was compulsorily acquired by an Australian government agency after 1 July 1998 and the taxpayer received money from the agency as a result of the acquisition.

The taxpayer used the money to acquire another vacant block of land. The land was acquired within one year of the end of the income year in which the original block of land was compulsorily acquired. The replacement block of land was not subject to the same Council restriction as the original block of land.

A taxpayer may be able to obtain a roll-over under Subdivision 124-B of the ITAA 1997 if a CGT asset they own 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, an authority of one of them or a local governing body established by or under a State or Territory law.

If a taxpayer receives money as a result of the compulsory acquisition of their asset they must satisfy the requirements in section 124-75 of the ITAA 1997 for roll-over to be available. Subsection 124-75(2) of the ITAA 1997 requires that the taxpayer incur expenditure in acquiring another CGT asset. 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 (subsection 124-75(4) of the ITAA 1997).

Taxation Determination TD 2000/42 provides some guidance as to the scope of the words 'use the other asset... for the same purpose... or for a similar purpose' in subsection 124-75(4) of the ITAA 1997. The Determination states that whether an asset is used for the same or a similar purpose as another asset is a question of fact and degree (paragraph 2 of TD 2000/42).

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 or the intended use of the land is not relevant.