Edited version of your written advice

Authorisation Number: 1012890806903

Ruling

Subject: Capital gains tax

Question 1

When land is disposed of under a contract is the capital gain or capital loss included in your assessable income for the income year in which the contract was entered into?

Answer

Yes

Question 2

Are you required to include the above capital gain or capital loss in your assessable income for the relevant income year before an actual change of ownership occurs?

Answer

No

Question 3

Will the Commissioner grant an extension of time to lodge an objection against your assessment when the settlement occurs outside the two year period of review?

Answer

No, as an extension is not required

Question 4

Will the Commissioner remit any interest or penalties imposed when the assessment is amended to include the capital gain after settlement occurs?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The property is a rural property. Two hectares of this land contains the main residence of one of the part-owners. There are three other part-owners.

A contract of sale was entered into and signed in the current financial year. Various instalments will then be made of several years before the final settlement.

The land title will not transfer until the final settlement payment is made. The purchaser will not have use of the land until the final settlement payment is made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1936, Section 170

Taxation Administration Act 1953 Schedule 1, Section 280-100

Taxation Administration Act 1953 Schedule 1, Section 280-160

Reasons for decision

1. Timing of CGT event

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 provides the Commissioner's view as to the year of income you are required 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. 

TD 94/89 refers to repealed subsection 160U(3) of the Income Tax Assessment Act 1936 (ITAA 1936). It was replaced by paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) which has the same meaning as the repealed section. Therefore the Commissioners views expressed in TD 94/89 apply equally to the equivalent provisions of the ITAA 1997. 

TD 94/89 provides that where the contract is settled in a later year of income, you are required to include a 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 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 year of income 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, after the contract for sale of the land is signed, various instalments will be made until the final settlement payment is made in several years. Therefore the date of the disposal of the property will when the contract is signed, and a capital gain will be derived by you in that year. You are required to include the capital gain in your return for that year; however you do not need to include that capital gain until settlement occurs, that is, after you receive the final settlement payment.

2. Period of review

Section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) outlines the situations where the Commissioner may amend an assessment. Generally, an individual taxpayer, subject to a number of exceptions, is entitled to a two year period of review.

The table in subsection 170(10AA) of the ITAA 1936 lists a number of situations where the two year period of review does not apply, and the Commissioner may amend the assessment at any time. Item 30 of the table allows the Commissioner unlimited time to amend an assessment to give effect to section 104-10 (3) of the ITAA 1997, that is, the occurrence of a CGT disposal when a change of ownership occurs.

As the Commissioner may amend an assessment at any time to give effect to this section, an extension of time to object to the assessment is not required.

3. Remission of shortfall interest charge

Under subsection 280-100(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) you are liable to pay shortfall interest charge (SIC) on an additional amount of income tax that you are liable to pay because the Commissioner amends your assessment for an income year.  

The SIC which applies on a daily compounding basis replaces the previous liability to pay the general interest charge during the shortfall period. According to subsection 280-100(2) of Schedule 1 to the TAA, the shortfall period extends from the due date for payment of the earlier, understated assessment to the end of the day before the day on which the Commissioner gives you notice of the amended assessment. 

Under subsection 280-160(1) of Schedule 1 to the TAA, the Commissioner may remit all or part of an amount of SIC if the Commissioner considers it fair and reasonable to do so. Without limiting subsection (1), the Commissioner in deciding whether to remit must, under subsection (2), have regard to:  

a)        the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the SIC; and 

b)        the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of the delayed payments. 

The Commissioner's guidelines on the remission of SIC are outlined in the ATO Law Administration Practice Statement PS LA 2006/8. Paragraph 35 of PS LA 2006/8 states that the extent of the remission must take into account the individual circumstances of a case and the extent to which factors beyond your control were responsible for the size and duration of the shortfall. It states at Paragraph 40 that the SIC and GIC (interest charges) are intended to restore a fair balance between taxpayers, ensuring that taxpayers who have paid tax on time are not disadvantaged relative to those who had the benefit of the tax shortfall until the amended assessment. 

Paragraph 5 of TD 94/89 explains that where an assessment is amended to include a net capital gain in the abovementioned circumstances, the discretion to remit general interest charge 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.

In your case, it is considered that the fact that settlement will not occur until several years after the contract is signed is beyond your control. It is therefore appropriate for the Commissioner to remit the SIC provided the amendments are lodged within 30 days of settlement occurring.