| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011708374568
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Capital gains tax on sale of home with a put and call option
Question 1
Are you liable for capital gains tax under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the total sale price of a home where you pay a commission to the option holder after receiving the full price the buyer pays?
Answer
Yes
This ruling applies for the following period:
1 July 2010 to 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You have a home.
It has been proposed that you sell your home.
You will receive the full price the buyer pays, with a commission payable to the option holder.
The contract does not include a sale price.
You requested a clause to be inserted in the contract stating you are only liable for the CGT on the difference between the price the buyer pays and the commission paid to the option holder. You were advised this was not necessary.
You wish to determine if you are liable for CGT on the total sale price, or the sale price less commission.
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Subsection 100-20(1)
Income Tax Assessment Act 1997 Section 100-25
Income Tax Assessment Act 1997 Section 100-35
Income Tax Assessment Act 1997 Section 104-5
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Division 116
Income Tax Assessment Act 1997 Section 116-10
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 116-45
Income Tax Assessment Act 1997 Subsection 116-65(3)
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.
For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.
Reasons for decision
All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated
Summary
You are liable for capital gains tax on the total sale price (the amount paid by the purchaser). However, the commission payable to the option holder may be included as a cost incurred when calculating your cost base.
Detailed reasoning
CGT assets are defined at section 108-5 to include any kind of property, or a legal or equitable right that is not property. Section 100-25 specifically includes items such as buildings and your home as CGT assets.
You can make a capital gain or loss only if a CGT event happens (subsection 100-20(1).
Section 104-5 lists the CGT events and CGT event A1, disposal of an asset is discussed at section 104-10. Disposal of a CGT asset of a home would result in a CGT event A1 occurring.
You make a capital gain if you receive (or are entitled to receive) capital amounts from the CGT event which exceed your total costs associated with that event (section 100-35).
Division 116 discusses capital proceeds. Capital proceeds is the term used to describe the amount of money or the value of any property received or are entitled to receive as a result of a CGT event happening. Section 116-20 explains the general rules about capital proceeds. Basically, the capital proceeds from a CGT event are the total of:
· the money that you receive, or are entitled to receive in respect of the event happening; and
· the market value of any other property you have received, or are entitled to receive in respect of the event happening.
However, modifications to the general rules of the calculation of capital proceeds are explained in brief in section 116-10. There are five modifications to the general rules of the calculation of capital proceeds. Section 116-45 explains the third rule, which is the non receipt rule. Specifically, it states that:
The capital proceeds from a CGT event are reduced if:
(a) you are not likely to receive some or all (the unpaid amount) of those proceeds; and
(b) this is not because of anything you (or your associate) have done or omitted to do; and
(c) you took all reasonable steps to get the unpaid amount paid.
The capital proceeds are reduced by the unpaid amount.
Therefore, the capital proceeds may be reduced by the unpaid amount, if the conditions in section 116-45 are satisfied.
Special rules are explained in subsection 116-65(3). The capital proceeds from the disposal of the asset include any payment you received for granting, renewing or extending the option.
In your case
Your home is a CGT asset, and disposal of that home is a CGT event A1.
For the purpose of calculating your capital gain the total of your capital proceeds is the amount that you were entitled to receive (the amount the purchaser paid).
You do not satisfy the requirements of section 116-45 to reduce your capital proceeds by the amount due to the option holder.
Your capital proceeds from the disposal of the home should include any payments you received for granting, renewing or extending the option.
Please note that the commission payable to the option holder may be included in determining your cost base for the house as a cost incurred.
Further issues for you to consider
We have not considered if the proceeds of the sale are assessable as ordinary income as opposed to capital gains tax.
We have not considered if the house is entitled to any exemptions such as the main residence exemption.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
