ATO Interpretative Decision

ATO ID 2004/59 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the ATO view on this matter is now contained in the Guide to capital gains tax 2004-2005.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does subsection 104-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard the capital gain or loss from a CGT event B1, if the sale of a house under an instalment sale contract (commonly known as a 'rent-buy' agreement) does not proceed?

Decision

Yes. Subsection 104-15(4) of the ITAA 1997 will apply to disregard the capital gain or loss from the sale if the contract does not proceed.

Facts

A taxpayer enters into a contract to sell a house under an instalment sale agreement, commonly known as a 'rent - buy' agreement.

Under the agreement, the purchase price is due to be paid to the vendor over a period of 15 years in weekly instalments consisting of principal and interest components. Until the full purchase price is paid to the vendor, the title to the property will not transfer to the purchaser. During the contractual period, the purchaser occupies the property and is responsible for the outgoings associated with the property such as rates and insurance.

The agreement contains a default clause which states that if an instalment is paid more than 30 days late, or if the purchaser dies, becomes mentally ill or is declared bankrupt, the vendor is entitled to rescind the agreement and require the purchaser to surrender possession of the property to the vendor. The vendor is entitled to keep any monies paid to them up to the date of the default.

Reasons for decision

The sale of a house under a 'rent-buy' agreement results in a CGT event B1 occurring (see ATO Interpretative Decision ATO ID 2004/58). Under the arrangement, the purchaser obtains the use and enjoyment of the property, although title to the property will not pass until the final instalment is paid, or at an earlier time if the balance of the purchase price is paid in full. The vendor will make a capital gain if the proceeds from the agreement are more than the cost base of the property.

However under paragraph 104-15(4)(a) of the ITAA 1997, a capital gain or loss from a CGT event B1 will be disregarded if title in the asset does not pass to another entity at or before the end of the agreement.

When a default clause in a 'rent-buy' agreement is triggered, the contract is rescinded. Title to the property remains with the vendor and does not pass to the purchaser. Therefore the vendor can disregard any capital gain or loss from a 'rent-buy' agreement that has been terminated.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 104-15
   subsection 104-15(4)

Related ATO Interpretative Decisions
ATO ID 2004/58

Keywords
Capital gains tax
CGT event B1-use & enjoyment before title passes
Breach of contract
Disposal of real estate
Sale by instalments

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  23 January 2004

ISSN: 1445-2782