ATO Interpretative Decision
ATO ID 2003/790
Income Tax
CGT: Acquisition of CGT asset - satisfaction of rights to have asset transferred to purchaserFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the taxpayer's contractual rights for the purchase of the asset are satisfied by the actual transfer of ownership of the asset?
Decision
No. CGT event C2 in section 104-25 of the ITAA 1997 does not happen when the contractual rights for the purchase of the asset are satisfied by the completion of the transfer of ownership of the asset to the purchaser. It is considered that the real transaction is the acquisition of the underlying CGT asset rather than the ending of the rights which merely facilitate the acquisition.
Facts
The taxpayer company entered into a contract for the purchase of real estate. The contract provided for settlement to occur six months from the date of entering into the contract. The contract price was for a fixed sum, payable 10% as a deposit and the balance on settlement. The contract was settled on the specified date. During the time between entering and completing the contract the market value of the property increased by $40,000.
Reasons for Decision
The UK case of Zim Properties Ltd v. Proctor (H M Inspector of Taxes) (1985) STC 90; 58 TC 371 (Zim Properties Case) concerned damages received by a vendor against a solicitor for negligence, where the buyer rescinded the contract of sale upon the failure of the vendor's solicitor to demonstrate good title to the property. The court took the approach that it was necessary to determine whether the damages were received in respect of the underlying property or the right to sue arising on the solicitor's default.
The decision in the Zim Properties Case is relevant to the Australian CGT provisions in that many transactions can be broken down into several sub-transactions, each of which might independently attract the operation of those provisions. In such situations, it is relevant for the Commissioner to consider what the real transaction is.
An executory contract for the transfer of a CGT asset is, by definition, itself a CGT asset. The subsequent performance of the contract discharges and satisfies the contractual rights and on the face of it may cause a CGT event C2 to happen.
However, in such circumstances, the real transaction is the acquisition of the underlying CGT asset (the property) rather than the ending of the rights that merely facilitate that acquisition. This approach is consistent with the view expressed in Taxation Ruling 95/35 regarding compensation receipts and identifying the relevant asset for the purposes of the CGT provisions.
In determining what the most relevant asset or transaction is, it is often appropriate to adopt a 'look-through' approach to the transaction or arrangement.
Accordingly, where the change of ownership of a CGT asset occurs under a contract, the CGT provisions of the ITAA 1997 will apply only to the acquisition of the underlying asset and not to the rights that merely facilitate the transaction.
Note: This ATO Interpretive Decision does not address the situation where the purchaser deals with the contractual rights other than by simply completing the purchase in accordance with the contract, for example, by assigning the contractual right to have the property conveyed. Such dealings are likely to be CGT events.
Date of decision: 7 August 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 104-25
Case References:
Zim Properties v. Procter (H M Inspector of Taxes)
(1985) STC 90
58 TC 371
Related Public Rulings (including Determinations)
Taxation Ruling TR 95/35
Keywords
Acquisition of assets
CGT assets
CGT events C1-C3 - end of a CGT asset
Interest in underlying asset
Ownership, interests, control & rights
Relevant CGT asset
ISSN: 1445-2782
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