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Edited version of private advice
Authorisation Number: 1051583203973
Date of advice: 19 September 2019
Ruling
Subject: Non-receipt of capital proceeds
Question
Can you amend your income tax return for the year ended 30 June 20xx 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 period:
Year ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
You entered into a contract for the sale of your business with the purchaser and a guarantor in a previous income year.
You declared accordingly the capital proceeds from this sale in your tax return.
Some of the proceeds were payable over a number of years after completion date of sale.
The guarantor executed a personal guarantee and indemnity in respect of the obligations of the purchaser under the contract. The obligations of the guarantor were continuing, absolute and unconditional.
The liability was secured against all the assets and undertakings of the purchaser. A record of this charge existed in the Personal Property Securities Register (PPSR).
The purchaser has not paid the principal sum and interest for a period of time after settlement date.
You sent demand letters and initiated proceedings to recover the debt.
The Court issued a default judgment against the guarantor.
The purchaser went on liquidation and not long after that, the guarantor became bankrupt.
An amount remains unpaid.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 170
Income Tax Assessment Act 1997 section 104-25
Income Tax Assessment Act 1997 section 108-5
Income Tax Assessment Act 1997 section 116-45
Reasons for decision
The non-receipt rule under section 116-45 has the effect of reducing the capital proceeds from a CGT event if the following conditions are met:
(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.
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.
A taxpayer cannot get both a reduction in capital proceeds for the unpaid amount and also a capital loss for the disposal of the debt, subsection 116-45(3) ITAA 1997.
Application to your circumstances
In your case, you ultimately tried to recover the outstanding loan amount from the guarantor by initiating legal proceedings. However, the purchaser and the guarantor eventually ended in liquidation and bankruptcy, respectively. Given these circumstances, it is probable that you will not receive the remaining balance of your capital proceeds.
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 an amendment to revise the amount of capital gains income.