Edited version of your private ruling

Authorisation Number: 1012540679909

Ruling

Subject: Capital gains tax - disposal

Questions and answers:

1. Do you include the capital gain on the sale of your property in your tax return for the financial year in which the contract is signed 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 the Commissioner exercise his discretion to remit any interest arising as a result of amendments to your tax returns after settlement?

Decline to rule.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You are in the process of selling your property that you jointly own, comprising of your main residence, including X hectares of land and the balance of hectares of further surrounding land.

You have signed an 'offer to purchase' note agreeing in principle to sell the property to the purchaser (subject to entering into a formal sale contract).

The terms of the agreement stipulated that the sale proceeds will be received in equal instalments over an approximate two year period after entering into the formal sale contract (likely to be in the current financial year).

The final settlement proceeds, which will reflect the formal settlement of the contract, will be received X years from the date the sale contract is entered into.

The formal contract of sale is not yet signed or ready to sign. However, the instructions are as follows:

1. The Vendors are to retain the right to possession of the land until the full purchase price has been paid.

2. The Vendors will allow the Purchaser access to the land solely for the purposes of:

a. undertaking a due diligence investigation of the land;

b. conducting surveys of the land; and

c. preparing any planning application for the development of the land.

You will remain on the property until you have located a suitable replacement home, using the funds from the initial deposit.

Assuming the contract progresses to settlement, you will request an amendment of your individual tax returns in respect of your personal tax returns for the year in which the sale contracts were entered into, to include the total net assessable capital gain proceeds for the disposal of the property. This will be requested within one month of the settlement date.

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 Sch1-Subdivision 280-B

Taxation Administration Act 1953 Sch1-Subdivision 280-C

Taxation Administration Act 1953 Subsection Sch1-359-35(2)

Taxation Administration Act 1953 Subsection Sch1-357-110(1)

Reasons for decision

Capital gains tax

Capital gains tax (CGT) is income tax you pay on any net capital gain you make and include in your annual income whenever a CGT event takes place.

Division 104 of the ITAA 1997 sets out the CGT events for which you can make a capital gain or loss. It explains how to work out if you have made a gain or loss from each event as well as the timing of each event.

Section 104-10 explains that 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 contract for the disposal or if there is no contract, when the change of ownership occurs.

Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or 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? states at paragraph 1:

Where the contract 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 is settled.

You will be entering into a contract to sell your property in the current financial year. You have signed an interim 'Offer to purchase' which sets out a plan of payments to be made over a period, from the date of signing the contract of sale. Settlement, and change of ownership, is therefore not expected to occur for approximately X years.

TD 94/89 provides that you do not have to include your capital gain or capital loss in your income for the year the contract of sale is signed until settlement has actually occurred. This will mean that you will ultimately have to submit a request to amend your tax returns for the relevant year to include your capital gain or capital loss.

Section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) points out that there are statutory time limits for the amendment of assessments. The general rule contained in subsection 170(1) of the ITAA 1936 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 is given to the taxpayer.

Under certain circumstances further outlined in subsection 170(1) of the ITAA 1936, the Commissioner may amend an assessment within four years after the day on which notice of the assessment is given to the taxpayer.

However, subsection 170(10AA) of the ITAA 1936 explains 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.

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.

CGT event A1 will occur due to the sale of your property. The time of the event is when you enter into the contract, which will be in the current financial year.

Upon settlement, which is likely to be in X years, the change of ownership will occur and it is at this time that you will each need to amend your assessments to include the capital gain or capital loss made if it has not previously been included.

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

You have made reference to paragraph 5 of TD 94/89 where an assessment is amended to include a net capital gain in circumstances like yours, the discretion to remit general interest charge (GIC) under the former subsection 170AA(11) of the ITAA 1936 would ordinarily be exercised providing requests for amendments are made within a reasonable time after the date of settlement. According to TD 94/89 a reasonable time is considered to be a period of one month after settlement.

Section 170AA of the ITAA 1936 was repealed as inoperative with effect from 14 September 2006. Law Administration Practice Statement PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods provides guidance on the remission of interest charges which accrue in a shortfall period.

Paragraph 36 of PS LA 2006/8 states that the extent of a remission of interest charges must take into account the individual circumstances of each case and the extent to which factors beyond your control were responsible for the size and duration of the shortfall.

You will be signing your contract for sale during the current financial year and settlement is not expected to occur for X years. During this period it is a possibility that either your personal situation or the purchaser's circumstances could alter. In so doing the contract for sale could consequently be revised to cater for these changes. The merits of your particular case cannot be accurately determined as the relevant factors that need to be considered will not be known until then.

Subsection 357-110(1) of the TAA explains that if the Commissioner considers that the correctness of a private ruling would depend on assumptions being made about a future event or other matter, he may decline to make the ruling. Furthermore, 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.

The Commissioner is therefore declining to rule on this question as it is conditional on factors which may be beyond your control.

You are able to seek the Commissioner's discretion at the time when all the facts are certain and the Commissioner will not have to make an assumption. As pointed out above, PSLA 2006/8 requires the Commissioner to examine each set of circumstances individually and make a decision based on the merits of each case.