| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051284387047
Disclaimer
You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.
Date of advice: 20 October 2017
Ruling
Subject: Capital gains tax
Question 1
Can you amend your income tax return for the year ended 30 June 2011 to reduce the amount of the capital proceeds that you received from your capital gains tax (CGT) event in accordance with section 116-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following periods
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
A business was sold by a company by way of a sale contract in the year ended 30 June 2011.
A shortfall was paid on settlement. The balance remained unpaid.
A claim was lodged by the company for the unpaid amount, and a defence and cross-claim lodged by the purchaser to defend against the claim for payment.
A Heads of Agreement was entered into whereby an amount of the shortfall less $100,000 would be paid in two instalments. The balance of $100,000 was not paid.
The tax return and capital gain for the year of disposal were lodged on the basis that the full consideration was included as capital proceeds to calculate the taxed capital gain.
The reason stated for the non-payment of $100,000 was that the purchaser claimed after taking possession that the business was overvalued and they were not able to pay the contracted purchase price.
The company maintained that the purchaser failed to carry out their due diligence properly.
The purchaser originally held back a shortfall, and when sued, the parties settled on the shortfall less $100,000 to finalise the matter.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 170(10AA)
Income Tax Assessment Act 1997 Section 104-5
Income Tax Assessment Act 1997 Section 116-45
Reasons for decision
Can you amend your income tax return for the year ended 30 June 2011 to reduce the amount of the capital proceeds that you received from your capital gains tax (CGT) event in accordance with section 116-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?
You sold a business in the year ended 30 June 2011 which triggered a CGT event, A1 (Disposal of a CGT asset), as listed in section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997). A capital gain was calculated on the capital proceeds named in the contract and a capital gain was returned in the year ended 30 June 2011.
The rules relating to capital proceeds are modified in some cases by other sections of the ITAA 1997. In the case where due proceeds are not received, the relevant section is subsection 116-45(1) of the ITAA 1997 which provides that the capital proceeds from a CGT event are reduced if:
(a) a taxpayer is not likely to receive some or all (the unpaid amount) of those proceeds; and
(b) this is not because of anything the taxpayer (or their associate) has done or omitted to do; and
(c) the taxpayer took all reasonable steps to get the unpaid amount paid.
The capital proceeds are reduced by the unpaid amount.
This means that where a CGT event happens and a part or all of the proceeds are not received through no fault of the taxpayer and despite reasonable steps having been taken to have the amount recovered, capital proceeds can be reduced to the actual amount received.
In your case, you were notified that you will not receive an amount which constituted part of your capital proceeds. The reason for this non-receipt is due to the purchaser claiming that after taking possession the business was overvalued and they were not able to pay the contracted purchase price, and hence is not due to an action or omission on your part, and you had taken all reasonable steps to recover the unpaid amount. You undertook legal proceedings to obtain the outstanding balance from the purchaser of the business. A Heads of Agreement in 2014 concluded on a Settlement Sum of $100,000 less than the outstanding balance to be paid in two instalments. The unpaid amount is $100,000.
The legal action you undertook resulted in the following factors;
● The purchaser advised they did not want to pay the balance, so the ‘non-receipt’ of proceeds was not a cause of your action or omission;
● You took legal action which resulted in accepting a lower amount.
You are therefore entitled to amend your return for the year ended 30 June 2011 to adjust the capital gain amount you have previously declared.
Section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) states that an amendment to a return can only be made within two years of the issue date of the original assessment for most taxpayers. However, subsection 170(10AA) of the ITAA 1936 removes the two year limit in order to facilitate the operation of certain provisions of the ITAA 1997. As section 116-45 of the ITAA 1997 is one of the provisions listed in subsection 170(10AA) of the ITAA 1936, there is no time limit for you to lodge an amendment to revise the amount of capital gains income.