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Subject: Capital gains tax - Real property - Deferred settlement

Question

Is the capital gain made under the contract for sale of land assessable in the year ended 30 June 2011?

Answer

 Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You entered into a contract with another Australian Company to sell real estate.

The contract includes special conditions, and if those conditions are met you will make a capital gain.

You have provided the following documents, which forms part of, and should be read in conjunction with this private ruling:

· Contract of sale of real estate between two Australian Companies.

· Vendor finance agreement

The following information has been sourced from this document:

Clause 1. (a)

The vendor consents to the purchaser making application to a local Council for such planning and other permits as are required for the demolition of any improvements on the land, the construction on the land of a multiple lot residential development and the associated subdivision of the land to yield a multiple lot residential development ("the development approval")

Clause 2. (a)

In consideration of the sum paid by the purchaser to the vendor under the contract of sale, it is agreed that on completion the vendor will be entitled to secure an amount on the security of a second mortgage over the property

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(2).

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

Reasons for decision

You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening to an asset in which you have an ownership interest.

You dispose of an asset when a change of ownership occurs from you to another entity. When property is disposed of under a contract, CGT event A1 occurs. The time of the event is when the contract is entered into.

Taxation Determination TD 94/89 (TD 94/89) provides the Commissioner's view as to the year of income you are required to include a capital gain or capital loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income. 

TD 94/89 provides that where the contract is settled in a later income year, you are required to include a capital gain or capital loss in the income year in which the contract is made, not in the income year in which the contract is settled. However, you are not required to include any capital gain or capital loss in the appropriate year until an actual change of ownership occurs.

Settlement effects a change of ownership and a disposal. When settlement occurs, you are required to include any capital gain or capital loss in the income year in which the contract was made. If an assessment has already been made for that year of income, you may need to have that assessment amended.

Although it is not required, you may, for convenience, include the capital gain or capital loss from the disposal of the land in your return for the income year in which the contract was entered into if you lodge that return before settlement occurs.

In your case you have entered into a contract involving the disposal of land. The property will be disposed pursuant to a conditional contract executed after 20 September 1985 with settlement to occur once the special conditions have been met. The conditions in the proposed contract of sale are conditions precedent to performance rather than precedent to formation of the contract.

Therefore the date of the disposal of the property will be after 20 September 1985, and a capital gain or capital loss will be derived by you in the 2010-11 income year. You are required to include the capital gain in your return for the 2010-11 income year; however you do not need to include that capital gain until settlement occurs.

Where an assessment is amended to include a net capital gain, and a liability for interest arises, the remission of interest will be dealt with in each case on its own merits.

On the basis that you request an amended assessment within 30 days of the settlement date, there will be no other tax shortfall penalties applicable if you advise us of the appropriate capital gain amount within the above mentioned 30 day period.