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Edited version of your written advice
Authorisation Number: 1051370863536
Date of advice: 14 May 2018
Ruling
Subject: Capital gains tax
Question
Can you be granted an extension of time to lodge an objection to tax assessments?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 May 20XX
Relevant facts and circumstances
You are a partnership registered for an ABN.
The partners hold assets equally.
The partnership acquired an industrial site which comprises various commercial buildings, warehouses and vacant land.
Rental income and expenses have been reported in the partnership income tax returns.
The net partnership income is declared in the partners’ respective personal income tax returns.
You have been approached by an unrelated third party prospective buyer.
Terms and conditions are agreed upon, in principal, between you and the buyer, and a contract is currently being drafted.
Under the proposed acquisition, the buyer will pay an option fee, payable in instalments before 1 July 20XX.
The buyer has the right to exercise the option to buy the property for an agreed amount in 3 years’ with settlement by 30 June 20XX.
When the option is exercised in the year ending 30 June 20XX to purchase the property a CGT event A1 will be triggered.
You have a limited amendment period of 2 years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-40
Income Tax Assessment Act 1997 Section 104-40(2)
Income Tax Assessment Act 1997 Section 104-40(5)
Income Tax Assessment Act 1936 Section 170(1)
Income Tax Assessment Act 1936 Subsection 170(6)
Reasons for decision
Section 104-40 of the Income Tax Assessment Act 1997 (ITAA 1997) states that granting of an option is a CGT event D2. When the option is granted there will be a capital gain that you must include in the partnership income tax return and subsequently the income will be reported in the individual income tax returns for the year ended 30 June 20XX.
Once the option is exercised the sale of the property will trigger a CGT event A1, as the sale is a disposal of a CGT asset pursuant to section 104-10 of the ITAA 1997. The option will not be exercised until the year ended 30 June 2022.
Subsection 104-40(5) of the ITAA 1997 provides an exception whereby the capital gain made from the grant of an option is disregarded if the option is exercised. Therefore if the option is exercised the income tax returns will need to be amended to remove the capital gain reported for the grant of the option.
As the partners are subject to a 2 year limited period of review under subsection 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936) they would normally be unable to amend their income tax returns when the option is exercised.
Subsection 170(6) of the ITAA 1936 provides that:
The Commissioner may amend an assessment even though the limited amendment period has ended if:
(a) the taxpayer applies for a private ruling under Division 359 in Schedule 1 to the Taxation Administration Act 1953 before the end of that period; and
(b) the Commissioner makes a private ruling under that Division because of the application.
As you have applied for a private ruling before the end of that period and it has been determined that you may need to lodge an amendment to your income tax returns for the year ended 30 June 20XX, you can amend your assessment even though the limited amendment period will have ended.