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Compulsory Acquisition and Capital Gains Tax

Compulsory acquisition has always been a controversial issue and has recently become more prevalent, particularly in cities like Sydney where major infrastructure requires land for roads adjacent to residential and commercial areas.

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The thought of your asset being compulsorily acquired is not a very pleasant one, however, this situation may expose you to a rollover concession that can sweeten the deal. Rolf Koops, Partner and Head of Tax at Madison Marcus provides a summary for you which will help you to determine whether this rollover concession may apply to your situation.

A rollover concession allows you to defer all or part of your capital gain from a CGT event happening to an active asset. If you choose to use the rollover relief, the capital gain will not be included in your assessable income.

When it comes to a compulsory acquisition, the following requirements must be met to qualify for the concession:

  • ●  The asset must be compulsorily acquired by a government agency;
  • ●  You must receive money or another asset as compensation;
  • ●  You must incur expenditure in acquiring another CGT asset;
  • ●  Some of the expenditure must be incurred within one year before and one year after the event occurs;
  • ●  The replacement asset must be used for similar purposes as the original asset.

It is essential that the entity acquiring the asset must be the Commonwealth, State or Territory and not simply an entity with the authority to acquire from these bodies. If the entity compulsorily acquiring the asset is doing so with only the permission of the government, then the rollover will not apply.

If you receive money for the event happening and choose to take advantage of the rollover, there are different consequences depending on whether the original asset is a pre or post CGT asset.

Pre-CGT asset
If you acquired your asset before 20 September 1985, then your asset is classified as a pre-CGT. Where this is the case and the taxpayer buys another asset in its place, the new asset is to be taken as a pre-CGT asset provided that the expenditure is not more than 120% of the market value of the original asset.

Post-CGT asset
A post-CGT asset is one that has been acquired on or after 20 September 1985. The calculation for a rollover relief for a post-CGT asset is as follows:

Where both the money received is more than the expenditure incurred to acquire another asset (excess) and the capital gain is greater than that excess then:

  • ●  The capital gain is reduced to the amount of the excess;
  • ●  The expenditure is reduced by the amount by which the gain exceeds the excess.

There may be circumstances where you receive a replacement asset in exchange for your compulsorily acquired asset instead of money. In this situation, any capital gain made from the original asset is disregarded. Another situation may involve the receipt of money and an asset in exchange for your asset and here, there are different consequences for each part of the compensation.

Compulsory acquisition related to main residence
The main residence exemption applies to disregard a capital gain or loss if it arises from any of the following circumstances:

  1. 1. Compulsory acquisition of part of the taxpayer’s main residence;
  2. 2. Compulsory ending of an ownership right over a taxpayer’s main residence;
  3. 3. Compulsory creation of a right over a taxpayer’s main residence;
  4. 4. Relevant negotiated agreements made in connection with such a compulsory transaction.

A capital gain or loss from such an event will only be disregarded to the extent that you would have been entitled to the main residence had it been disposed of just before the compulsory acquisition. There are also different CGT rules that limit this main residence exemption.

Navigating the tax implications when it comes to assets that have been compulsorily acquired can be difficult as there are many elements to it. Madison Marcus Tax Partner, Rolf Koops can help you to better understand how you could be eligible for these exemptions. Contact Rolf on:

Rolf Koops
Partner – Tax
+61 2 9762 0480

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