ATO Interpretative Decision
ATO ID 2002/941
Income Tax
Capital gains tax - time of CGT event C2FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the timing of CCT event C2 determined by reference to paragraph 104-25(2)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997'), where a payment is received under an indemnity acquired as part of the capital proceeds of an earlier CGT event?
Decision
Yes. The timing of CGT event C2 is determined by reference to paragraph 104-25(2)(b) of the ITAA 1997 when a payment is received under an indemnity, as the indemnity is considered to be discharged or satisfied at that time.
Facts
The taxpayer entered into a contract to sell a CGT asset. Under the terms of the contract the taxpayer received cash and several other benefits in return for the CGT asset. The benefits included an indemnity against specified future costs. A payment has now been received under the indemnity.
Reasons for Decision
Paragraph 104-25(1)(b) of the ITAA 1997 states that CGT event C2 happens to an intangible asset when it is released, discharge or satisfied. It is therefore necessary to consider when an indemnity is discharged. Subsection 104-25(2) of the ITAA 1997 specifies that the time that a CGT event C2 occurs is:
'The time of the event is:
The full Federal Court in FCT v. Dulux Holdings Pty Ltd & Orica Ltd [2001] FCA 1344; 2001 ATC 4658; (the Orica Case) held that a chose in action was created by the contract and the due performance of the contract gave rise a deemed disposal. Accordingly, the deemed change in ownership took place not under the original contract, but on the progressive discharge of the chose in action. The Court held that subsection 160U(3) of the Income Tax Assessment Act 1936 (ITAA 1936) did not apply. However, subsection 160U(4) of the ITAA 1936 did apply to make the time of the disposal the time of each payment.
(Note: In respect of CGT event C2 paragraph 104-25(2)(a) of the ITAA 1997 is the equivalent of subsection 160U(3) of the ITAA 1936. In respect of CGT event C2 paragraph 104-25(2)(b) of the ITAA 1997 is the equivalent of subsection 160U(4) of the ITAA 1936)
The application of the principles established in the Orica Case mean that the timing of CGT event C2 is when payments under the indemnity are made and not when the original contract was entered into. At the time of the payment the indemnity ends by the asset being discharge or satisfied.
Date of decision: 26 June 2002Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1997
paragraph 104-25(1)(b)
subsection 104-25(2)
paragraph 104-25(2)(a)
paragraph 104-25(2)(b)
subsection 160U(3)
subsection 160U(4)
Case References:
FC of T v. Dulux Holdings Pty Ltd & Orica Ltd
[2001] FCA 1344
2001 ATC 4658
ATO ID 2002/958
Keywords
Capital gains tax
CGT assets
CGT events C1-C3 - end of a CGT asset
ISSN: 1445-2782