When an investment property is compulsorily acquired by a government authority, most investors assume the capital gain will be taxed immediately.
That is often the starting point — but it is not always the end of the story.
Under Subdivision 124-B of the Income Tax Assessment Act 1997, a little-known CGT rollover may allow an investor to defer the capital gain where a property is compulsorily acquired and a replacement asset is purchased. For the right client, this can preserve cash flow, support reinvestment, and reduce the tax pressure that often follows an involuntary sale.
As infrastructure projects continue across Australia, this is an area that more investors may need to face one day.
A typical example
Consider a couple, Michael and Sarah Bennett, who own a long-term rental property in South East Queensland. They are living overseas for work when their investment property is resumed by a government authority as part of a major transport project.
They receive compensation and plan to purchase another Australian investment property. Their key questions are the same ones many investors ask in this situation:
- Can the capital gain be deferred?
- Does living overseas stop the rollover?
- Will withholding tax apply at settlement?
- Does the replacement property need to be purchased immediately?
- And can any stamp duty on the replacement purchase be recovered?
These are exactly the issues that need to be reviewed early.
What is Subdivision 124-B?
Subdivision 124-B is not a full exemption in the ordinary sense. It is better understood as a rollover of a replacement asset.
Where the rules are satisfied, the capital gain on the compulsory acquisition may be deferred rather than taxed straight away. In practice, the gain is usually carried forward into the replacement asset rather than permanently lost.
This can be especially valuable where the investor did not choose to sell, and simply wants to replace one income-producing property with another.
When can the rollover apply?
The rollover may apply where a CGT asset is compulsorily acquired by an Australian government agency, or in some cases, where the property is sold after a formal notice has been issued with a view to compulsory acquisition.
Where compensation is received in money, the taxpayer generally needs to acquire another CGT asset and incur replacement expenditure within the required time period. Broadly, that expenditure must usually be incurred no earlier than one year before the event and no later than one year after the end of the income year in which the event occurs, unless the Commissioner allows further time.
The replacement asset must also be used, for a reasonable period, for the same purpose or a similar purpose as the original asset just before the event. For a rental property, the cleanest replacement is usually another property genuinely acquired and held as an investment property.
Why timing matters
One of the biggest traps is misunderstanding when the CGT event happens.
In a compulsory acquisition case, the relevant date may not simply be the final settlement date. Depending on the facts, the important timing point may be when compensation is first received, or when the acquiring authority takes possession or enters the land.
That date matters because it sets the timing window for replacement assets. If the timeline is misunderstood, a client may assume the rollover is available when it is already under pressure.
Does foreign residency prevent the rollover?
Not necessarily.
A client living overseas is not automatically excluded from using Subdivision 124-B. Foreign residency, by itself, does not preclude the rollover.
However, if the taxpayer is a foreign resident at the relevant time, the original asset and the replacement asset must generally be taxable Australian property. Australian real property will usually satisfy that requirement.
The real difficulty is often not the rollover itself, but the way foreign residency affects the withholding process.
Foreign resident withholding is a separate issue
This is where many investors and advisers get caught.
The federal CGT rollover and the foreign resident capital gains withholding rules are separate regimes.
If the owner is an Australian resident for tax purposes, the usual process is to obtain an ATO clearance certificate before settlement.
If the owner is a foreign resident, the usual pathway is not a clearance certificate. Instead, a variation notice may be needed if the client wants the withholding rate reduced. Otherwise, withholding may apply even if a rollover is ultimately available.
This means the issue often needs to be addressed before settlement, not left until tax return time.
Does the replacement property need to be identified immediately?
Not always.
The law itself allows a replacement window, so the replacement asset need not be fully settled before the original property is resumed.
However, in practical terms, especially where a foreign resident is seeking a withholding variation, the ATO is likely to be more comfortable if there is real evidence of the proposed replacement purchase. A signed contract, expected settlement date, intended rental use, and ownership details will usually place the client in a stronger position than a general intention to “buy something later.”
Do not overlook state-based stamp duty issues
The federal CGT rollover is only part of the story.
In Queensland, there does not appear to be a separate transfer duty rollover for replacement property that mirrors the federal Subdivision 124-B rules. In other words, transfer duty will generally still apply when the replacement property is purchased.
However, that does not mean the duty cost should be ignored.
Under the Queensland compulsory acquisition legislation, certain replacement-property costs may form part of the disturbance compensation claim, including stamp duty on replacement land, as well as related mortgage, legal, and financial costs, subject to the statutory limits.
That is an important practical distinction. For a Queensland resumption, the replacement-property stamp duty issue may need to be raised as part of the compensation negotiation with the acquiring authority, rather than treated as a separate state tax rollover application.
A similar compensation-based approach may arise in other states, although the rules are not uniform. This is why state-based relief should always be reviewed alongside the federal CGT position.
Common traps investors should avoid
This area is technical, and there are several recurring traps.
The first is assuming the rollover is a permanent tax exemption. It is usually a deferral, not a permanent escape from tax.
The second is getting the event timing wrong and focusing only on the settlement date, rather than the earlier compensation or possession date.
The third is buying the wrong replacement asset. If the original property was a long-term rental, the replacement asset should generally align with the same-or-similar-purpose requirement.
The fourth is ignoring foreign resident withholding until late in the process, when the settlement outcome may already be affected.
The fifth is missing the state compensation angle. If stamp duty and related costs can be claimed as part of the resumption process, that opportunity should be considered early.
What accountants need to consider before advising
Before advising on a compulsory acquisition matter, we would usually want to review:
- the compulsory acquisition notice, resumption documents, or compensation deed
- The timing of the first compensation, possession, and settlement
- the original purchase contract and cost base records
- capital improvements and depreciation history
- the client’s tax residency position
- the proposed replacement property and intended use
- whether the original and replacement assets satisfy the taxable Australian property requirements
- whether a clearance certificate or a variation notice is needed
- and whether stamp duty or other replacement costs should be raised as part of the state compensation claim
These matters often require coordination between the accountant, solicitor, and conveyancer. A good tax outcome is not just about knowing the law — it is also about managing the facts and documents properly before the transaction is complete.
Why this concession matters
Subdivision 124-B is a very little-known concession.
Most investors know about negative gearing, depreciation, and the 50% CGT discount. Very few know that a compulsory acquisition may allow a rollover of a replacement asset.
That is why this issue deserves more attention. A compulsory acquisition is not a normal sale. Investors may be forced to dispose of a property they intended to keep, and the ability to defer CGT can make a substantial difference to their reinvestment options and cash flow.
At the same time, state-based compensation rules may help recover some of the replacement-property costs, including stamp duty in the right case.
Handled properly, this can turn a difficult event into a manageable one. Handled poorly, it can result in unnecessary withholding, lost cash flow, and missed concessions.
Need Help?
Need advice on a compulsory acquisition or replacement property purchase?
If your investment property is being resumed or compulsorily acquired, we can help you assess:
- whether CGT rollover relief may be available under Subdivision 124-B
- how foreign residency and withholding may affect the transaction
- whether a replacement purchase is being structured correctly
- and whether stamp duty or related costs should be raised as part of the compensation process
Contact Umbrella Accountants before settlement so the tax and compensation issues can be reviewed early.
Need advice on a compulsory acquisition or replacement property purchase?General Disclaimer
This article is general information only and should not be relied on as legal or tax advice. Tax residency, compensation structure, replacement timing, ownership, and asset use all need to be reviewed in light of the specific facts.