Edited version of private ruling

Authorisation Number: 1011855541204

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Ruling

Subject: Capital proceeds payable by instalments - not all received before 30 June

Question 1:

In calculating the capital gain or capital loss to include in your return for the year ended 30 June, do the capital proceeds include payments by instalments that have not been received?

Answer: Yes.

Question 2:

Will the non-receipt rule under section 116-45 of the Income Tax Assessment Act 1997 (ITAA 1997) have immediate application for the company?

Answer: No.

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, the company, operate a business. You have recently undergone a significant change in operation.

During the year ended 30 June 2011, you signed a draft contract for the sale of the business.

At the time it was expected that payments for the sale of the business would be completed on or before 30 June 2011 and that the said contract would be finalised. The full payment has not been made by that date.

You are now considering action to recoup the outstanding amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(3).

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Subsection 103-10(2).

Income Tax Assessment Act 1997 Section 116-45.

Income Tax Assessment Act 1936 Subsection 170(10AA).

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

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

Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if a capital gains tax (CGT) event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset - for example, if you sell an asset for more than you paid for it, the difference is your capital gain.

According to section 116-20 of the ITAA 1997, the capital proceeds from a CGT event are the total of:

· the amount of money you have received, 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 (worked out as at the time of the event).

In relation to a CGT event, if you do not receive money or property until a later time, or it is payable by instalments, the CGT provisions apply as if you are immediately entitled to receive the money or other property.

Specifically, subsection 103-10(2) of the ITAA 1997 states that a reference to a person being entitled to receive money includes a reference to a person being entitled to receive money either immediately or at a future date and either in a lump sum or by instalments.

In your case, CGT event A1 occurred when you entered into the contract for the sale of your business. Therefore, the income year ended 30 June 2011 is the year that you are required to declare any capital gain or capital loss you have made from this event.

We appreciate that at the time you entered the contract of sale, you did not receive the entire purchase price. However, for the purposes of calculating your capital gain or capital loss the capital proceeds include any lump sum payments and any instalments you may receive. This is because you are considered to be entitled to receive all of these amounts even though you may not receive some of them until future income years.

Therefore, you are required to declare the total capital gain on the sale of your business in the income year ended 30 June 2011.

Non-receipt rule

The non-receipt rule in section116-45 of the ITAA 1997 applies where:

(a) it is unlikely that taxpayer will receive some or all of the capital proceeds from a CGT event

(b) the default in payment has not arisen from anything the taxpayer (or an associate) did or failed to do, and

(c) the taxpayer has taken all reasonable steps to obtain payment.

Under the non-receipt rule the capital proceeds are reduced by the unpaid amount.

Where, as will often be the case, the non-receipt rule is triggered in an income year following the "disposal year" it will be necessary to obtain an amended assessment to reflect the retrospective reduction in the capital proceeds in the disposal year.

In order for the non-receipt rule to apply, a "non-payment" must firstly occur and you must have then taken all reasonable steps to pursue the unpaid amount.

Item 80 in subsection 170(10AA) of the Income Tax Assessment Act 1936 (ITAA 1936) specifically provides for an assessment to be amended at any time to recognise a reduction in capital proceeds under the non-receipt rule.

In your case, you were to receive payment in instalments payable before 30 June 2011. At 30 June 2011 there was an outstanding amount. At this time you have not taken all reasonable steps to recoup the unpaid amount. If, after taking all reasonable steps to have the outstanding amount paid to you, and you have still not been paid, you will be able to amend your return for the year ended 30 June 2011 to exclude the outstanding payment from the capital gain.

However, you cannot apply the non-receipt rule at the present time.