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Edited version of your private ruling
Authorisation Number: 1012501104514
Subject: CGT - main residence - disposal - settlement
Question:
Do you only include the capital gain in your income tax return for the year of the contract once settlement has occurred?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts:
You and another party own a property, which you use as you main residence.
You do not use the property to earn assessable income.
You have been approached by a property developer who wants to purchase your property.
You are in the initial stages of negotiations; one of the clauses to be included is for settlement of the contract to occur after a number of years of the contract being entered into.
The proposed development is also subject to local council approval.
The developer will not have use and enjoyment of the property prior to settlement.
Relevant legislative provisions:
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 subsection 104-10(3)
Income Tax Assessment Act 1936 subsection 170(1)
Income Tax Assessment Act 1936 subsection 170(10AA)
Reasons for decision:
You make a capital gain or capital loss as a result of a Capital gains tax (CGT) event happening to a CGT asset in which you have an ownership interest.
The property that you own is a CGT asset and if it is disposed of, the disposal will result in CGT event A1 happening. The time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.
Where the contract is settled in a later year of income, you are still required to include your capital gain or capital loss in the year of income in which the contract is made, not in the year of income in which the contract is settled. However you do not need to include any capital gain in the appropriate year until an actual change of ownership occurs.
If a contract is subject to a condition, for example approval of finance, it does not affect the timing of the CGT event unless it is a condition precedent to the formulation of the contract. Most conditions (e.g. standard 'subject to finance' clauses) operate as conditions subsequent to formation of the contract and do not affect the time of making of the contract.
If a contract falls through before completion there would not be a CGT event as no change in ownership would have occurred.
In your circumstances, while settlement will occur in a subsequent financial year, for CGT purposes you will have disposed of your property at the time you entered into the contract for disposal. Accordingly, the capital gain that you made on the sale of your property will need to be included in your assessable income for the financial year the contract was signed.