Edited version of private ruling

Authorisation Number: 1011645651257

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Ruling

Subject: Timing of capital gains tax (CGT) event

1. Do you include the capital gain on the sale of your property in your tax return for the 2010-11 income year under the contract in accordance with paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), even if the contract is settled in a later year?

Yes.

2. Will granting access to the purchaser of the property for preliminary or minor works prior to settlement cause CGT event B1 to be invoked under section 104-10 of the ITAA 1997?

No.

3. Will the Commissioner exercise his discretion to remit any interest arising as a result of amendments to the applicants tax returns after settlement?

Decline to rule.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The applicants jointly purchased after 20 September 1985.

The property is also the principal place of residence of the applicants.

A primary production business has been operation on the property since acquisition.

A recent rezoning of the property has brought it within a residential development zone.

A deposit on signing of the contract is required with the balance of purchase monies payable upon settlement in five years time.

One offer also includes a further deposit to be paid after two and a half years.

The taxpayers will continue to have full use and enjoyment of the property and carry on their primary production business until settlement in five years time.

At some time prior to settlement the purchaser may wish to carry out some preliminary works such as surveying or similar activities which may require their presence on the property.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 170(1)

Income Tax Assessment Act 1936 subsection 170(10AA)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(3)

Taxation Administration Act 1953 subsection Schedule 1-359-35(2)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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

These reasons for decision accompany the Notice of private ruling for the applicants.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

1. Do you include the capital gain on the sale of your property in your tax return for the 2010-11 income year under the contract in accordance with paragraph 104-10(3)(a) of the ITAA 1997, even if the contract is settled in a later year?

CGT event A1 happens if you dispose of a CGT asset that you own. You are taken to have disposed of an asset if there is a change of ownership of the asset from you to another entity. The time of the event will normally occur at the time that you enter into the contact for the disposal or if there is no contact - when the change of ownership occurs.

This is supported by Taxation Determination TD 94/89 paragraph one which states:

Where a contact is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract was settled.

As stated in TD 94/89 where a contact is settled in a later year of income, you are required to include your capital gain or capital loss in the year of income in which the contract was made, not in the year in which the contract is settled.

In your case, you expect the contract to be entered into in the 2010-11 income year. When settlement occurs, you are then required to include any capital gain or capital loss in the year of income in which the contract was made. However, TD 94/89 provides that an entity does not have to include the capital gain or capital loss until settlement has actually occurred.

Section 170 of the ITAA 1936 provides statutory time limits for the amendment of assessments by the Commissioner. The general rule is that where there has not been any fraud or evasion the Commissioner may amend an income tax assessment within two years after the date the notice of assessment was given to the taxpayer (item 1 of the table in subsection 170(1) of the ITAA 1936).

Item 4 of the table in subsection 170(1) of the ITAA 1936 advises that if item 1, 2 or 3 does not apply, the Commissioner may amend an assessment within four years after the day on which he or she gives notice of the assessment to the taxpayer.

However, subsection 170(10AA) of the ITAA 1936 provides that nothing in section 170 of the ITAA 1936 shall prevent the amendment, at any time, of an assessment for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997 (item 30 of the table in subsection 170(10AA) of the ITAA 1936).

Section 104-10 of the ITAA 1997 states that a CGT event A1 happens if a taxpayer disposes of an asset. Paragraph 104-10(3)(a) of the ITAA 1997 provides that the time of CGT event A1 is when you enter into the contract for the disposal of the CGT asset. The effect of this paragraph may be to bring forward the time when a gain is assessable from the year of disposal to an earlier income year that is the year in which the contract for the disposal was entered into. Taxation Determination TD 94/89 states that a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs.

The words 'for the purpose of giving effect to' in subsection 170(10AA) of the ITAA 1936 mean that the Commissioner does not have an unrestricted time limit for issuing an amended assessment in respect of a capital gain. The provision will only apply when the reason for the Commissioner being out of time is the operation of subsection 104-10(3) of the ITAA 1997, that is where there is a delay between the contract being entered into and the actual change of ownership. For example, in a situation where a taxpayer enters into a contract in year one, and does not settle until year six, the Commissioner can rely on subsection 170(10AA) of the ITAA 1936 to amend the assessment in respect of year one, as the amended assessment is for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997.

How this applies to your situation

CGT event A1 will occur due to the sale of the property. The time of the event is when you enter into the contract, which you expect to be the 2010-11 income year.

Upon settlement in the 2015-16 income year, the applicants will have to amend their assessments for the 2010-11 income tax year to include the capital gain made if it has not previously been included.

2. Will granting access to the purchaser of the property for preliminary or minor works prior to settlement cause CGT event B1 to be invoked under section 104-10 of the ITAA 1997?

CGT event B1 occurs when use of the CGT asset passes.

You have advised that the applicants will continue to occupy the property and have full use and enjoyment of the property until settlement. Therefore; the granting of access to the property for minor preliminary works by the purchaser would not invoke CGT event B1.

Will the Commissioner exercise his discretion to remit any interest arising as a result of amendments to the applicants tax returns after settlement?

Subsection 359-35(2) of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a private ruling does not have to be given if making the ruling would prejudice or unduly restrict the administration of the taxation law. This includes the situation where the application relates to issues that do not affect your income tax liability.

Taxation Determination TD 94/89 states that:

Where an assessment is amended to include a net capital gain, and a liability for interest arises under section 170AA(1) (repealed), the remission of interest will be dealt with in each case on its own merits. We would expect, however, that the discretion in subsection 170AA(11) (repealed), would ordinarily be exercised to remit the interest in full where requests for amendment are lodged, and where relevant self-assessments are made within a reasonable time after the date of settlement. In most instances, we would consider a period of one month after settlement would be a reasonable period.

The Commissioner looks at each case individually and makes a decision based on the merits of each case.

The merits of a particular case cannot be determined beforehand as the relevant factors that need to be considered cannot be accurately known until then.

We decline to rule as it is conditional upon the individual's reasons including the factors beyond the individual's control.

Note

We have not fully considered the application of Part IVA of the ITAA 1936to the arrangement you asked us to rule on. However, please be advised that Part IVA 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.