Edited version of your written advice

Authorisation Number: 1013141317287

Date of advice: 22 December 2016

Ruling

Subject: Income tax - Capital gains tax - CGT events - CGT event A1 - Disposal of a CGT asset

Question 1

Can the Trust defer the net capital gain (“the capital gain”) in relation to the disposal of real estate under a contract entered into during the year of income ended 30 June 201X but which is due to settle in a later income year until such time as the balance of proceeds due to the Trust is received?

Answer

Yes

Question 2

Can the Trust net income for the purposes of subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) not include the capital gain until the contract is settled? Can the Trust income tax return for the year ended 30 June 201X not disclose any beneficiary as having a share of capital gain at label 54F pursuant to subdivision 115C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Can the Trust amend the income tax return in respect of the year of income in which the contract for the sale was entered into after settlement to form the capital gain as part of the net income of the Trust for the year ended 30 June 201X and disclose beneficiaries as having a share of capital gain at label 54F?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You entered into a contract during the relevant income year with another entity to sell real estate.

The purchaser paid a deposit on entering into the contract and the balance of the purchase price is payable by the purchaser on completion of the contract. The contract is due to settle on a date, being a year of income ending after the year in which contract was entered into.

The amount of the net capital gain will not be finally determined until settlement takes place.

The capital gain arising from the disposal of the real estate is the only capital gains tax event that occurred during the income year.

You have provided the following:

● Relevant clauses from the contract of sale of real estate between the two entities which detail the obligations of the parties to the contract

● Relevant clauses from the constitution which detail the obligations of the beneficiaries and the trustee of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Subsection 104-10(1)

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

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

Income Tax Assessment Act 1936 Subsection 95(1)

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Subsection 102-5(1)

Schedule 1 to the Tax Administration Act 1953 Subsections 280-160(1)

Schedule 1 to the Tax Administration Act 1953 Paragraph 280-160(2)(b).

Reasons for decision

Question 1

Can the Trust defer the net capital gain (“the capital gain”) in relation to the disposal of real estate under a contract entered into during the year of income ended 30 June 201X but which is due to settle in a later income year until such time as the balance of proceeds due to the Trust is received?

Summary

Yes. Net capital gain (“the capital gain”) made by the Trust in relation to the disposal of real estate under a contract entered into during the year of income ended 30 June 201X is deferred until settlement occurs in a later income year when the balance of proceeds due to the Trust is received.

Detailed reasoning

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 (section 102-20 of the ITAA 1997).

Under subsection 104-10(1) of the ITAA 1997 the disposal of a CGT asset causes a CGT event A1 to happen. You dispose of an asset when a change in ownership occurs from you to another entity (subsection 104-10(2) of the ITAA 1997). Subsection 104-10(3) of the ITAA 1997 provides that the timing of the event is when 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 (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 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 loss in the appropriate year until an actual change of ownership occurs.

In your case you have entered into a contract involving the disposal of land. There is no conditions precedent to formation of contract. Therefore the date of disposal of the property will be DD MM YY and a capital gain or capital loss will be derived by you in the year ended 30 June 201X. You are required to include the appropriate capital gain in your tax return for the year ended 30 June 201X. However you do not need to include the capital gain until the settlement takes place.

Question 2

Can the Trust net income for the purposes of subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) not include the capital gain until the contract is settled? Can the Trust income tax return for the year ended 30 June 201X not disclose any beneficiary as having a share of capital gain at label 54F pursuant to subdivision 115C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. The net income of the Trust for the purposes of subsection 95(1) of the ITAA 1936 does not have to include the capital gain until the contract is settled. The Trust's income tax return for the year ended 30 June 201X is not required to disclose any beneficiary as having a share of capital gain pursuant to section 115-215 of the ITAA 1997 at label 54F.

Detailed reasoning

Net income, in relation to a trust estate, broadly means the total assessable income of the trust estate calculated under subsection 95(1) of the ITAA 1936 as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

TD 94/89 provides that settlement effects a change of ownership and a disposal. When settlement occurs you are required to include any capital gain or loss in the year of income in which the contract was made.

In your case you don't have to include the capital gain as part of the Trust net income for the income year until such time as the contract for sale is completed and settlement occurs.

Subdivision 115-C of the ITAA 1997 sets out the rules for dealing with the net income (as defined in section 95 of the ITAA 1936) of the trust that has a net capital gain for the income year.

The purpose of section 115-215 of the ITAA 1997 is to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the presently entitled beneficiaries (subsection 115-215(1) of the ITAA 1997).

The trust's net income attributable to the trust's capital gains (section 115-225 of the ITAA 1997 Attributable gain) is the product of:

(a) Capital gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1) of the ITAA 1997 and

(b) Share of the capital gain (section 115-227 of the ITAA 1997)

A beneficiary's share of the capital gain of the trust pursuant to section 115-227 of the ITAA 1997 is the sum of:

(a) the amount of the capital gain to which the beneficiary is specifically entitled and

(b) the beneficiary's share of capital gains derived by a trust that no beneficiary is specifically entitled and to which the trustee is not specifically entitled as determined by section 115-227(b) of the ITAA 1997.

In your case the capital gain do not form part of the net income of the Trust until settlement occurs, therefore the beneficiaries of the Trust could not have an entitlement to the share of net income attributable to the capital gain of the Trust. As such, the Trust's tax return is not required to disclose any beneficiary having a share of Trust's capital gain at label 54F for the year ended 30 June 201X.

Question 3

Can the Trust amend the income tax return in respect of the year of income in which the contract for the sale was entered into after settlement to form the capital gain as part of the net income of the Trust for the year ended 30 June 201X and disclose beneficiaries as having a share of capital gain at label 54F?

Summary

Yes. The trustee of the Trust can amend the income tax return in respect of the year of income in which the contract for the sale was entered into after settlement to form the capital gain as part of the net income of the Trust for the year ended 30 June 201X and disclose beneficiaries share of capital gain at label 54F.

Detailed reasoning

TD 94/89 provides that you are required to include the capital gain or loss in the income year in which the contract was made when the settlement occurs. If an assessment has already been made for that year of income, you may need to have that assessment amended.

You are required to amend the Trust tax return for the year ended 30 June 201X after the settlement of the contract to include the capital gain as part of the Trust net income and disclose each beneficiary's share of capital gain in accordance with subdivision 115-C of the ITAA 1997.

TD 94/89 provides where an assessment is amended to include a net capital gain, and a liability for interest arises under subsection 170AA(1) of the ITAA 1936, the remission of interest will be dealt with in each case on its own merits. TD 94/89 further states that we would expect, however, that discretion in subsection 170AA(11) of the ITAA 1936 would ordinarily be exercised to remit the interest in full where request for amendment is lodged within a reasonable time after the date of settlement. We would consider a period of one month after settlement to be a reasonable period.

Subsection 170AA of the ITAA 1936 has being repealed and replaced with Division 280 of Schedule 1 to the Tax Administration Act 1953 (TAA) applicable to 2004-05 and later income years. The Commissioner may remit all, or part of, an amount of shortfall interest charge (SIC) if the Commissioner considers it fair and reasonable to do so (subsection 280-160(1) of the TAA). The extent of any remission must take into account the individual circumstances of a case and the extent to which factors beyond the taxpayer's control were responsible for the size and duration of the shortfall (paragraph 280-160(2)(b) of the TAA).