1 Will the acquisition of a replacement property intended to be used as your principal place of residence - satisfy the 'same or similar purpose' requirement under subsection 124-75(4) of the Income Tax Assessment Act 1997(ITAA 1997)?
1 Yes. Question 2 Will the Commissioner exercise discretion under subsection 124-75(3) of the Income Tax Assessment Act 1997(ITAA 1997) to allow you an extension of time to 30 June 20XX to incur expenditure on acquiring the replacement property? Answer 2 Yes. This ruling applies for the following period : Year ended 30 June 20XX Year ended 30 June 20XX Year ending 30 June 20XX The scheme commenced on: XX January 20XX
In MM 20YY, the property became part of the Precinct Structure Plan/PSP. The Precinct Structure Plan is a long-term plan for urban development. It describes how the property is expected to be developed, the services planned to support development and how they will be delivered. On DD MM 20YY you purchased XX acres (XX.XX hectares) of adjoining land. Settlement occurred on DD MM 20YY. There was no existing dwelling on the land at the time of purchase. At the time you purchased the land, you were living overseas. You purchased the property as a partially fenced lot, knowing that due to the PSP the land would likely be compulsory acquired: (a) by the State Government for a state school (i.e. the transaction relating to this Private Ruling); (b) by Local Government for active open space, which is expected to occur in the near future; and (c) for a price equal to the "highest and best use" (i.e. residential property development). You acquired the XX-acre property in 20YY with the intention on constructing a family home and using the land as a lifestyle property. A Contract for Sale of your purchase has been provided as part of the private ruling.
In MM 20YY, you entered into a contract with a Builder A to construct a dwelling on the land. The builder withdrew from the contract in MM 20YY due to no services (such as electricity and water) being connected at the property at that time. You attempted to locate another builder to construct the dwelling, however the lack of connected services made this difficult. In MM 20YY you entered into a contract with Builder B. Shortly after, they began construction on your dwelling. In MM 20YY there was a break-in on the building site, and items were stolen. The builder did not have the appropriate insurance, and they refused to replace stolen items. On DD MM 20YY following the dispute, they abandoned the construction. The construction wasn't fully completed at that time, and keys were not returned. You have lodged a dispute with the relevant state authority on DD MM 20YY, and the matter is still outstanding at the time of the issue of this ruling. On DD MM 20YY you engaged a locksmith to regain access to the uncompleted dwelling. You moved into the dwelling on DD MM 20YY. You engaged various tradespersons to complete the outstanding construction works, which were completed in MM 20YY.
You began receiving your mail at the dwelling in MM 20YY. The certificate of occupancy for the dwelling was issued on DD MM 20YY. After representations to the Office of State Revenue, you were granted a Principal Private Residence exemption for the 20YY and 20YY land tax years. You have stated the land was not developed for sale or any other business purposes. The primary use of the property has always been as a place to live. The property has never been used for business or an income generating activity. Compensation/acquisition A total of approximately XX acres was compulsory acquired on DD MM 20YY by the Department. X acres(X hectares) included your principal place of residence and will be treated as exempt from CGT on this basis as per a Notice of Decision issued DD MM 20YY. Of the X hectares of your original land which is now being compulsorily acquired (Lot X, XX & XX), X hectares represent, your principal private residence. The current application relates to the balance of the XX acres compulsory acquired representing approximately X acres.
You have been offered so far, $XX,XXX,000 but you think it is at the low end of the scale of what the land is worth. However, has taken that payment while reserving all your rights to claim a greater compensation amount. Page XX of the State Gazette dated DD MM 20YY titled the XXXX Act 19YY detailed the Notice of Acquisition of your home. A title search document has been provided for your property compulsorily acquired. Compensation of $XX,XXX,000 was received on DD MM 20YY; however, you are disputing the compensation amount and has formally sought further compensation. The X hectares (including the house) apportioned represents approximately $X,XXX,000 of the $XX,XXX,000 proceeds received. You have currently not lodged the 20YY income tax return. The dwelling has not been used to produce assessable income since you moved in. You did not own any other residential property in Australia from 20YY onwards. During your ownership of the property, you have also added value to the property by investing in erecting and maintaining: • boundary and internal fencing (20YY-ongoing); and • a house and storage structures/outbuildings (20YY-ongoing).
You bought the original property to be close as possible your father so that he could look after him in his old age, while still having his own place to live. Replacement property intent You intend to acquire a replacement property to be used as your principal place of residence. The new property: • May or may not have an existing dwelling at the time of acquisition. • Will be larger than a standard residential block, but not necessarily acreage or farming land. • Will be used solely as your home, with no investment or business purpose. Evidence of property search You have actively inspected and/or enquired into the following properties: • Property A, State A • Property B, City B, State B • Property C, State A • Property D, State B You have also made enquiries into former government school sites that maybe listed for sale: • Property E, State C • Property F, State C • Property G, State C You had paused purchasing activity while awaiting the outcome of the second private ruling, which has now been withdrawn. Use of the original land
The property, though large in size, was acquired and used as a private lifestyle property. You constructed and occupied a home on the land and used the remainder passively. No part of the land was used for business, commercial or investment purposes. The proposed replacement property will be used in a materially similar way - as your principal residence with no intent to derive income or subdivide. The land was not developed for sale or any other business purposes. The primary use of the property has always been as a place to live. You did not engage in any business-like activity on the land, aside from building his residence and fencing, etc. There was no active attempt to generate profit, and the property was not held for resale or business purposes. Reasons for a request for extension of time: • Compensation was not received until DD MM 20YY, limiting the practical window for compensation. • Lifestyle properties of this scale and nature are increasingly scare, and locating a suitable property comparable to the original requires an extensive amount of time.
• You have stated that it is possible in relation to such an expensive replacement property, that the settlement could be long. You have heard of settlement periods of up to X-XX years. • Delays in the original construction and establishment of a main residence outside your control. You stated you did anticipate the possibility of at least part of the land being compulsorily acquired, which could result in a gain. However, this was a secondary consideration, and not the primary reason for the purchase. You expected any acquisition to occur in a long-term time frame (X to XX years+). You would like to buy another, property(s) using some of the proceeds.
Income Tax Assessment Act 1997, section 100-20 Income Tax Assessment Act 1997, section 100-33 Income Tax Assessment Act 1997, section 104-10 Income Tax Assessment Act 1997, subdivision 124-B Income Tax Assessment Act 1997, subsection 124-70 Income Tax Assessment Act 1997, subsection 124-75 Income Tax Assessment Act 1997, subsection 124-85 Income Tax Assessment Act 1997, subsection 995-1(1) Tax Determination TD 2004/40
Question 1 Capital gains and losses Section 100-20 of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens. This section also makes it clear that the specific time of when the CGT event happens is important, particularly for working out in which income year a capital gain or loss occurred. In specific situations, you may be able to defer or disregard a capital gain or loss from a CGT event by availing yourself of a roll-over. Section 100-33 of the ITAA 1997 provides that there are two types of roll-overs: • replacement-asset roll-over, which allows you to defer a gain or loss from one CGT event until a later CGT event where an asset is replaced with another asset • same-asset roll-over, which allows you to disregard a gain or loss from a CGT event where the same asset is involved. CGT event A1 Section 104-10 of the ITAA 1997 states that CGT event A1 occurs if you dispose of an asset, whether because of some act or event or by operation of law. The capital gain or loss is made at the time of the event. Did CGT event A1 occur?
You involuntarily disposed of part of the property (X.XXX hectares) you owned because it was compulsorily acquired by a statutory authority. Subsection 104-10(6) provides that if an asset was acquired from you by an entity under a compulsory acquisition power conferred by Australian law, the time of the event is the earliest of: • when you received compensation for the acquisition • when the entity became the owner of the asset • when the entity entered the asset under the relevant power • when the entity took possession under that power. Applicable to your circumstances Consequently, CGT event A1 occurred in respect of part of the Property when it was compulsorily acquired on DD MM 20YY. Replacement-asset roll-overs Division 124 of the ITAA 1997 contains the replacement-asset roll-overs that allow you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event.
A replacement-asset roll-over may be available when you give up, surrender, or relinquish an asset you own, or your ownership ends in some other way, and as part of the same circumstances you receive another asset to replace the original asset. When a roll-over is available Subdivision 124-B of the ITAA 1997 contains a roll-over for when assets are compulsory acquired, lost or destroyed. Section 124-70 of the ITAA 1997 sets out the circumstances in which the roll-over relief may be available. You must make a positive choice to avail yourself of the roll-over under section 124-70. Paragraph 124-70(1)(a) provides that you may be able to choose a roll-over if a CGT asset you own is compulsorily acquired by an Australian government agency. Paragraph 124-70(2)(a) provides that the roll-over is only available if you receive either money or another CGT asset, or both, as compensation for the original asset being compulsorily acquired.
If you received money as compensation for the involuntary disposal of a CGT asset, you must incur expenditure to acquire another CGT asset (but not certain depreciating assets) to avail yourself of the roll-over. Generally, the expenditure must be incurred within a period starting one year before the compulsory acquisition event and ending one year after the end of the income year in which the event occurred. Same or similar purpose There are two requirements in subsection 124-75(4) of the Income Tax Assessment Act 1997 , either of which can be satisfied. The first requirement in subsection 124-75(4) relates to the use of the 'other asset' (that is, the replacement CGT asset) in your business or its installation ready for use in the business. The second requirement in subsection 124-75(4) relates to the use of the other asset for the same purpose as, or for a similar purpose to, the purpose for which you used the original asset.
You have stated the Property was not being used for a productive or business purpose at the time of the acquisition, so the second requirement of 'same or similar purpose' must be satisfied for the relief available under subsection 124-75(4) of the ITAA 1997 to apply. 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, your original land was not used for any purpose immediately before the compulsory acquisition other than as a main residence on large area of land with balance over 2 hectares being put to no actual use other than being left vacant. The requirement in subsection 124-75(4) of the ITAA 1997 will therefore be satisfied if you use the money to acquire another parcel of land with a dwelling used for the same purpose, to be considered 'same or similar'. Was the Property acquired by an Australian government agency?
For the purposes of subdivision 124-B, "Australian government agency" takes its meaning from subsection 995-1(1) of the ITAA 1997: (a) the Commonwealth, a state or a territory, or (b) an authority of the Commonwealth or of a state or territory. In FC of T v Bank of WA Ltd, FC of T v State Bank of NSW Ltd ,Hill J listed some of the relevant issues with determining whether an entity is a public authority. Hill J stated that for an entity to be an authority of a state or the Commonwealth, the entity must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must exist to achieve a government purpose. Hill J also stated the entity must perform a traditional or inalienable function of government and have governmental authority for doing so. The relevant entity was a statutory authority of a state government and constituted by state legislation. As the statutorily authority is constituted by an Act and it executes a function in the public interest and to achieve government purposes, we consider that it is an Australian government agency. Consequently, the Property was compulsorily acquired by an Australian government agency.
Applicable to your circumstances You received money as compensation for the compulsory acquisition of part of the Property (X.XXX hectares). Consequently, you must have incurred expenditure to acquire another asset to avail yourself of the roll-over provided for in subdivision 124-B. As immediately prior to its compulsory acquisition the Property was used as a main residence with the balance of the property (X hectares approx.) compulsory acquired left vacant and set no productive use. You had until DD June 20YY to acquire another 'same or similar' property to affect the roll over. Question 2 Is the replacement-asset roll-over available to you? In the year ended 30 June 20XX, CGT event A1 happened in respect of the Property as it was compulsorily acquired by the statutory authority. This event gave rise to a capital gain. Capital gains or losses can be deferred or disregarded in specific situations by availing yourself of a roll-over. Subdivision 124-B of the ITAA 1997 sets out the requirements for roll-over relief when an asset is compulsorily acquired. There are specific requirements for when you receive money as compensation.
To date you have not incurred or advised expenditure has been incurred to acquire a replacement CGT asset. Timing of the expenditure to acquire a new CGT asset As discussed above, subsection 124-75(3) of the ITAA 1997 requires that for you to avail yourself of the replacement-asset roll-over provided for in subdivision 124-B of the ITAA 1997, you must incur expenditure in acquiring another CGT asset within a period starting one year before the compulsory acquisition and ending one year after the end of the income year in which the compulsory acquisition occurred. However, in special circumstances, paragraph 124-75(3)(b) gives the Commissioner the discretion to allow further time after the end of the income year in which the compulsory acquisition occurred for the expenditure to be incurred.
Paragraph 124-75(2)(a) of the ITAA 1997 states that a taxpayer must "incur expenditure" in acquiring a CGT asset (i.e., the replacement property in this case). Pursuant to subsection 124-85(2), where the expenditure incurred is equal to or greater than the compensation amount received by the applicant, the capital gain arising on the compulsory acquisition of the property will be disregarded (assuming all the other relevant Subdivision 124-B requirements are satisfied). Subdivision 124-B of the ITAA 1997 does not require that the applicant spend the actual compensation received (i.e., the cash from the State Government Authority) but that the applicant incur expenditure in acquiring the replacement property. The original asset (Property) was acquired on or after 20 September 1985, so the relevant legislation for post-CGT assets is subsection 124-85(2) of the ITAA 1997. Item 3 of the table in subsection 124-85(2) applies where the money received does not exceed the expenditure incurred.
In this case, should you purchase a replacement property, and fund the acquisition with a mixture of cash received from the compulsory acquisition and cash received from a loan with a financial institution, so long as the total amount incurred in acquiring the replacement property is equal to or greater than the compensation amount received from the compulsory acquisition the requirements in item 3 of the table in subsection 124-85(2) of the ITAA 1997 will be satisfied. Special Circumstances 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 outlines that the expression 'special circumstances' in the context of subsection 124-75(3) of the ITAA 1997 by its nature is incapable of a precise or exhaustive definition. What constitute 'special circumstances' depends on the facts of each particular case. Some examples of special circumstances are provided in TD 2000/40. In particular, Example 3 in TD 2000/40 states: 'Graeme had a commercial property compulsorily acquired by a State Authority. Graeme is having a protracted legal dispute with the authority over the quantum of the compensation. On these facts, we would accept that there are special circumstances to allow further time.' 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. Application to your circumstances Under paragraph 124-75(3)(b) of the ITAA 1997, the Taxpayers would need to incur some of the expenditure no later than one year after the end of the income year. You have provided the following reasons for the delay: • Compensation of $XX,XXX,XXX was received on DD MM 20YY; however, you are still disputing the compensation amount and has formally sought further compensation. • Compensation was not received until DD MM 20YY, limiting the practical window for compensation. • Properties of this scale and nature are increasingly scarce, and locating a suitable property comparable to the original requires an extensive amount of time.
As part of the private ruling request, you have also provided evidence of you actively seeking a replacement property in order to affect the rollover provision as intended. The lack of certainty as to the final compensation payment amount, and the lengthy processes obtaining a property of this scale, has delayed your ability of you to search for and acquire an appropriate replacement asset. On these facts, we would accept that there are special circumstances to allow further time to incur expenditure to acquire a replacement asset. Furthermore, by granting this extension of time to acquire replacement asset: • there does not appear to be any prejudice to the Commissioner or any other parties. • there is no unsettling of people or of established practices. • there does not appear to be any mischief involved in this case; and • the Commissioner considers it to be fair to people in like positions and the wider public interest.
Accordingly, the Commissioner will exercise the discretion under paragraph 124-75(3)(b) of the ITAA 1997 to extend the time until 30 June 20YY, for you to incur expenditure to acquire a replacement asset.