Edited version of your written advice

Authorisation Number: 1013130932229

Date of advice: 25 November 2016

Ruling

Subject: Full remission of all GIC, all SIC and penalties

Question

Will the Commissioner of Taxation exercise his discretion under sections 8AAG, 280-160 and 298-20 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to remit all GIC, all SIC and any penalty that may arise if you amend your 20XX-YY income tax return to include an increased capital gain due to receiving additional capital proceeds from an earnout right and you request the amendment within one month of becoming aware of the amount of the increased capital gain?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on

1 July 2013

Relevant facts and circumstances

1. You held CGT assets.

2. You, together with other sellers, entered into an Agreement which recorded the sale of the assets.

3. An initial payment was received by you and others and under the Agreement more possible contingent payments were agreed upon.

4. You included the capital gain from the sale of the assets in your 20XX-YY tax return.

5. To date neither you nor the other sellers have received any further proceeds from the sale. however, you now expect that one or more milestones set out in the Agreement may be achieved in the future, in which case you will be eligible to receive additional consideration from the sale of the assets.

Assumption(s)

Nil

Relevant legislative provisions

Taxation Administration Act 1953 Section 8AAG of Schedule 1

Taxation Administration Act 1953 Section 280-160 of Schedule 1

Taxation Administration Act 1953 Section 298-20 of Schedule 1

Reasons for decision

Practice Statement Law Administration PS LA 2006/8 discusses remission of shortfall interest charge and general interest charge for shortfall periods.

PS LA 2006/8 sets out circumstances in which consideration should be given to remitting interest charges that are imposed on shortfalls and accrue during the shortfall period. Where this practice statement mentions 'interest charges' it is talking about:

● Shortfall interest charge (SIC)

● 'Shortfall' general interest charge (GIC) - that is, GIC accrued during the shortfall period on the shortfall amount, and

● Interest and GIC imposed under section 170AA of the Income Tax Assessment Act 1936 (ITAA 1936).

One circumstance where consideration should be given to remitting the interest charge is covered under paragraph 29 where a taxpayer could not have been aware of a shortfall when lodging their tax return.

A shortfall amount may arise in situations where the taxpayer did not know and could not have known that a shortfall would arise when they lodged their original return or activity statement. This would occur where the return or activity statement is correct, and it is only future events that trigger the need to adjust a liability. An example of this is where a taxpayer becomes entitled to a receipt of compensation in a particular year, which may in some circumstances trigger an adjustment to capital proceeds and affect capital gains or losses in an earlier year's return

Each case must be examined on its merits. In the above example, it may be appropriate for the granting of full remission of interest charges related to the shortfall, usually on the condition that appropriate amendment requests are lodged within a reasonable time after the need to amend arises, if required.

In another example, Taxation Determination TD 94/89 at paragraph 5 discusses a situation where land is sold under a contract in one income year but settlement does not occur until the next income year. In this situation any capital gain must be included in the tax return for the earlier income year but it is not required to be included until settlement takes place. Consequently, an amendment may be required for the assessment for the earlier income year to include a capital gain which results in a liability for interest. TD 94/89 states that although the remission of interest will be dealt with in each case on its own merits, we would expect that a discretion would ordinarily be exercised to remit the interest in full where requests for amendment are lodged, and where relevant, self-amendments are made, within a reasonable time after the date of settlement. In most cases we would consider a period of one month after settlement to be a reasonable period.

In your case you sold your assets to the buyer and also entered into an earnout arrangement with the buyer. In your 20XX-YY income tax return you included the capital gain made on the sale of the assets in relation to the initial payment received in the 20XX-YY financial year.

When the 20XX-YY income tax return was lodged you could not have known for certain whether any extra payment would eventuate or the quantum of the payment. The 20XX-YY income tax return was correct when it was lodged. A possible payment may occur in the future which may require you to adjust your 20XX-YY income tax return.

Given the examples above and your circumstances, the Commissioner thinks it is reasonable and fair to remit any interest charge or penalty in relation to an amendment resulting from the receipt of an earnout right payment if you request the amendment within a month of receiving the extra payment.

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