Edited version of private advice

Authorisation Number: 1051873172929

Date of advice: 23 July 2021

Ruling

Subject: CGT - disposal of land where contract of disposal settles in later income year

Question 1

Whether you will include your CGT liability relating to the disposal of land in the 20XX income year in which the contract for the disposal was entered into, albeit that the contract will settle in the 20XX income year.

Answer

Yes

Question 2

Are you required to include your CGT liability in the 20XX income year when the actual change of ownership occurs at settlement?

Answer

Yes

Question 3

Are you allowed to amend your tax return for the 20XX income year in order to include your CGT liability relating to the disposal of land which happened in that year, albeit that the contract will settle in the 20XX income year?

Answer

Yes

Question 4

If you lodge a request for amendment in respect of your 20XX tax return within a period of one month after settlement of the contract, will the Commissioner exercise the discretion to remit any shortfall interest charges and general interest charges which maybe applicable?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

XX November 20XX

Relevant facts and circumstances

The three of you own XX hectares of land (the property) situated in Australia in equal shares. You inherited the property in November 20XX.

You advised that one of you is currently living on the property and that person intends to claim the main residence exemption on their portion of the capital gain.

The contract for the disposal (sale contract) of the property was dated XX November 20XX (date of sale) for a total purchase price of $XX million.

The settlement date is 4 years from the date of sale as specified under the sale contract.

The sale contract specified that the purchase price will be paid in instalments as follows:

•                by a deposit of $XX thousand upon acceptance of the offer

•                by a deposit of $XX thousand 14 days from receipt of the sale contract

•                by a deposit of $XX million 28 days from date of contract

•                by a deposit of $XX thousand one year from date of contract

•                by a deposit of $XX thousand two years from date of contract

•                by a deposit of $XX thousand three years from date of contract

•                by a final payment of $XX million at settlement date.

You confirmed that title of the property will not transfer to the purchaser until final payment is made. The purchaser will not have use of the property until the settlement date and when final payment is made.

In an email from your tax agent, you advised that the purchaser has requested a delayed settlement date with slight adjustments to the payment terms.

In an email from your tax agent, you provided a copy of the amended sale contract (the deed) with an effective date of XX July 20XX.

On and from the effective date, the parties agree that the sale contract is varied relevantly on the following terms:

Additional payments

•         On the effective date the purchaser shall pay to the vendor the sum of $XX million which shall be treated by the vendor as an instalment towards the purchase price and shall be deducted from the balance due and payable at settlement under the contract.

•         On or before XX November 20XX, the purchaser shall pay to the vendor the sum of $XX million which shall be treated by the vendor as an instalment towards the purchase price and shall be deducted from the balance due and payable at settlement under the contract.

Balance of purchase price due at settlement

•         The balance of the purchase price payable by the purchaser to the vendor at settlement under the contract will be $XX million.

Settlement

•         The settlement and settlement date under the contract will be varied to XX November 20XX or earlier by mutual agreement.

Additional interest payment

•         Simple interest at a rate of XX% per annum will be payable by the purchaser to the vendor on the balance of the purchase price for the period between XX November 20XX and settlement date;

•         The interest rate payable to the vendor shall be in addition to the balance of the purchase price and is to be paid to the vendor at settlement.

The parties agree that the variations set out in the deed are intended to vary and modify the sale contract to the extent necessary such that in event of any inconsistency the variations set out in the deed will take priority and apply.

The parties acknowledge and agree that the sale contract and the provisions contained in the contract as varied by the deed will remain in full force and effect and continue to bind the parties. There's nothing in the deed that affects the rights and obligations of the parties to the extent that relate to the period prior to the effective date unless it is expressly provided otherwise. Apart from the variations set out in the deed, the parties confirm that the sale contract remains unchanged in all other respects.

The deed and the sale contract constitute the entire agreement between the parties.

Relevant legislative provisions

Income Tax Assessment Act 1997

Division 5

section 102-5

section 102-20

section 104-10

section 108-5

section 118-110

section 118-115

section 118-120

section 118-195

Income Tax Assessment Act 1936

section 170

subsection 170(10AA)

Taxation Administration Act 1953

section 8AAG

subsection 280-100(1) of Schedule 1

subsection 280-160(1) of Schedule 1

ATO References

Taxation Determination TD 94/89

Law Administration Practice Statement PS LA 2006/8

ATO Document QC 52247

Reasons for decision

Questions 1 and 2

Summary

The timing of CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) is when the contract of sale or disposal is made. Therefore, you will include the capital gain or loss from the disposal event in the income year in which the contract is made, not in the income year in which the contract is settled. However, you are not required to include any capital gain or capital loss in the appropriate year until when settlement occurs giving effect to the change of ownership and disposal of the property.

Detailed reasoning

Section 108-5 of the ITAA 1997 defines a CGT asset to be any kind or property, or a legal or equitable right that is not property. Land is a CGT asset.

Your assessable income includes your net capital gain for the income year. You work out your net capital gain in a certain way as set out in section 102-5 of the ITAA 1997.

You can make a capital gain or capital loss if and only if a CGT event happens to an asset in which you have an ownership interest. The gain or loss is made at the time of the event - section 102-20 of the ITAA 1997.

CGT - Disposal event (CGT event A1)

CGT event A1 happens if you dispose of a CGT asset - subsection 104-10(1) of the ITAA 1997.

You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law - subsection 104-10(2) of the ITAA 1997.

The timing of CGT event A1 is when you enter into a contract for the disposal (sale contract) - paragraph 104-10(3)(a) of the ITAA 1997.

Taxation Determination TD 94/89

TD 94/89 deals with subsections 160U(3) and 160M(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 160U(3) was about acquisition or disposal under contract, and subsection 160M(1) was about change in ownership - both provisions were rewritten as section 104-10 of the ITAA 1997 and were repealed by Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 with effect from 14 September 2006.

Guidance on the status and binding effect of public rulings where the law has been repealed or repealed and rewritten is contained in Taxation Ruling TR 2006/10 Public Rulings, paragraphs 32 and 49-51. Relevantly, it explains:

If the Commissioner has made a public ruling about a relevant provision and that provision is re-enacted or remade, the public ruling is taken to be about the re-enacted or remade provision, insofar as the new law expresses the same ideas as the old law. However, if the law is substantively changed, the part of the public ruling dealing with the changed law ceases to apply.

Accordingly, TD 94/89 does apply in relation to the rewritten law in section 104-10 of the ITAA 1997 because the rewritten law expresses the same ideas as the repealed law in subsections 160U(3) and 160M(1) of the ITAA 1936.

TD 94/89 (at paragraphs 1 to 3) expresses the view that where the contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled. Where land is disposed of under a contract, the disposal is deemed to have taken place when the contract is made. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal. When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made.

Application to your circumstances

In this case, the sale contract for the property was entered into on XX November 20XX (date of sale). Accordingly, the timing of CGT event A1 is in the 20XX income year pursuant to section 104-10 of the ITAA 1997.

The settlement date as originally specified in the sale contract was set on 25 November 20XX. However, the sale contract has been amended to extend the settlement date and to adjust the payment terms. Under the amended contract with effect from XX July 20XX, the settlement date has been moved to XX November 20XX or earlier by mutual agreement between the parties. As such following amendment to the sale contract, settlement is expected to occur in the 20XX income year.

Therefore, based on TD 94/89, you will include the capital gain or loss from CGT event A1 in the 20XX income year in which the sale contract was made. You are required to do this in the 20XX income year, when settlement under the contract occurs on XX November 20XX (or at earlier date) giving effect to the change of ownership and disposal of the property.

Question 3

Summary

You are allowed to amend your tax return for the 20XX income year to include any CGT liability from the sale or disposal of the property under subsection 170(10AA) of the ITAA 1936 when settlement of the contract of sale or disposal occurs in the 20XX income year.

Detailed reasoning

Section 170 of the ITAA 1936 outlines the situations where the Commissioner may amend an assessment. The general rule is that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual: item 1 in the table in subsection 170(1) of the ITAA 1936.

Subsection 170(10AA) of the ITAA 1936 provides that nothing in section 170 prevents the amendment of an assessment at any time for the purpose of giving effect to certain provisions of the ITAA 1997. The table in that subsection lists the relevant provisions where the Commissioner may amend the assessment at any time. Item 30 of the table allows the Commissioner to amend an assessment to give effect to section 104-10(3) of the ITAA 1997. That is, the time of CGT event A1 is decided by there being a contract entered into for the sale or disposal of an asset wherein the disposal of the asset happens when a change of ownership occurs.

Application to your circumstances

Based on the amended sale contract effective XX July 20XX, the new settlement date is on XX November 20XX or earlier by mutual agreement between the parties. Accordingly, settlement will occur in the 20XX income year giving effect to the change of ownership and disposal of the property. In the 20XX income year, you are then required to include your capital gain or capital loss from the disposal event that happened in the 20XX income year. This would mean you need to amend your tax return for the 20XX income year.

You are allowed to amend your tax return for the 20XX income year to include any CGT liability from the sale or disposal of the property under subsection 170(10AA) of the ITAA 1936 when settlement of the contract of sale or disposal occurs in the 20XX income year.

Question 4

Summary

In the circumstances, it is considered appropriate for the Commissioner to remit the shortfall interest charges and general interest charges which maybe applicable provided you lodge a request for amendment in respect of your 20XX tax return within one month after the date of settlement.

Detailed reasoning

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 - subsection 280-100(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Division 5 of the ITAA 1997 provides for when the amount of income tax and SIC becomes due and payable. It also provides for general interest charge (GIC) on any part of the additional amount (plus any SIC) that remains unpaid after the additional amount is due and payable.

The Commissioner may remit all or part of an amount of SIC if the Commissioner considers it fair and reasonable to do so - subsection 280-160(1) of Schedule 1 to the TAA.

The Commissioner may remit all or part of an amount of GIC if the Commissioner considers it fair and reasonable to do so - section 8AAG of the TAA.

The Commissioner's Guidelines on remission of SIC and GIC are set out in Law Administration Practice Statement PS LA 2006/8.

In reviewing a remission request we consider certain matters. For example, a remission may be granted when you are unable to lodge or pay on time:

•                due to circumstances beyond your control, or

•                if the delay was caused by you and you have taken reasonable steps to mitigate the effect of those circumstances.

The Commissioner's remission policy is set out in TD 94/89 (at paragraph 5) where it explains that if an assessment is amended to include a net capital gain in the circumstances of delayed settlement, the discretion to remit interest charges would ordinarily be exercised providing requests for amendments are made within a reasonable time after the date of settlement. The Commissioner considers a period of one month after settlement to be a reasonable time.

Application to your circumstances

In your case, the settlement date as amended under the sale contract is on 22 November 20XX or earlier by mutual agreement between the parties. As such settlement will be in the 20XX income year. The settlement date is set as part of the terms and conditions of the contract and is beyond your control.

It is therefore considered appropriate for the Commissioner to remit the GIC and SIC which maybe applicable provided you lodge a request for amendment in respect of your 2018 tax return within one month after the date of settlement.

Other matters

It is submitted that one of you will be claiming the main residence exemption on their portion of the capital gain. The main residence exemption is limited to 2 hectares of land with a dwelling erected on the land at the time of sale. The exemption is not available if the land is sold without a dwelling - sections 118-115 and 118-120 of the ITAA 1997.

Section 118-110 of the ITAA 1997 provides for main residence exemption in relation to a dwelling or your ownership interest in it if you are an individual; and the dwelling was your main residence throughout your *ownership period; and the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.

There is a separate rule for beneficiaries and trustees of deceased estates in section 118-195 of the ITAA 1997. It is submitted that you inherited the property on XX November 20XX. Accordingly, the rules in section 118-195 would apply. For more information refer to ATO document QC 52247.