Edited version of private ruling

Authorisation Number: 1011908590411

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Ruling

Subject: Sale of property

Question 1

Will any capital gain made on the disposal of your interests in the property be assessed in this income year?

Advice/Answers

Yes.

Question 2

Can any capital gain made on the disposal of your interests in the property (acquired within 12 months of the contract date) be discounted in view of the long settlement time?

Advice/Answers

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You owned a property with another individual. The first interest was owned for some years.

The other individual then sold their share of the property to you within a few months of the sale contract referred to below.

An entity subsequently entered into a contract to buy the entire property from you subject to some special conditions.

The effects of the special conditions were that there could be a long settlement period for the sale, and the contract could end if certain requirements were not met.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Subsection 115-25(1)
Income Tax Assessment Act 1997 Subsection 116-20(1)

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, 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

Question 1

Capital gains tax (CGT) event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), relating to the disposal of a CGT asset, happens when you enter into the contract for the disposal of the CGT asset, or if there is no contract, when the change of ownership occurs.

In your case, CGT event A1 happened when you disposed of your interests in the property. Each of your interests in the property acquired at different times are separate CGT assets. The CGT event happened on the date that the contract for the sale of the property was entered into.

Paragraph 1 of Taxation Determination TD 94/89 states that where the contract 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 is made, not in the year in which the contract is settled.

The time that a contract is made depends upon the terms of the contract and any relevant legislation in each State. If a contract is subject to a condition, it does not affect the time of the making of the contract unless it is a condition precedent to the formation of the contract. Most conditions (for example, standard 'subject to finance' clauses) operate as conditions subsequent to the formation of the contract and do not affect the time of making of the contract. (Case 24/94 94 ATC 239 at 246-248; AAT Case 9451 (1994) 28 ATR 1108 at 1116-1118).

Although the contract for disposal in your case is subject to special conditions which provide that the contract can end if certain requirements are not met, these are conditions subsequent to the formation of the contract and will not alter the time of the CGT event.

Any capital gains that you make on the disposal of your interests in the property will therefore be included in your assessable income for this income year. Paragraph 3 of TD 94/89 states, however, that a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal. When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended. Paragraph 5 of TD 94/89 discusses the liability for interest in these cases.

You will therefore not be required to include any capital gain from the disposal of your interests in the property in your income tax return or assessment for this income year until settlement of the sale occurs.

Question 2

Under Division 115 of the ITAA 1997, you can use the discount method to calculate your capital gain from the disposal of each of your interests in the property if:

· you are an individual, a trust or a complying superannuation entity

· a CGT event happens to an asset you own

· the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

· you acquired the asset at least 12 months before the CGT event and

· you did not choose the indexation method.

The discount percentage is 50% for individuals.

In relation to requirement (d), which is contained in subsection 115-25(1) of the ITAA 1997, you will need to determine for each of your interests in the property whether that interest was acquired at least 12 months before the CGT event. There is no provision which would allow the end date for the purposes of this requirement to be extended in view of a long settlement period.

There is also no provision in the income tax legislation which would allow any capital gain from the sale of your interests in the property to be otherwise discounted in view of the long settlement period.

Note

Taxation Ruling TR 94/29 discusses the CGT consequences of a contract for the sale of land falling through.