Edited version of private advice

Authorisation Number: 1052303462366

Date of advice: 16 October 2024

Ruling

Subject: CGT - call option over property

Question 1

Will CGT event A1 happen under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) on the date the Purchaser exercises the Call Option over the Property?

Answer

Yes.

Question 2

Are the Owner and Primary Beneficiaries required to include a capital gain or loss from CGT event A1 in their assessable income under section 102-5 of the ITAA 1997 for the relevant income year, before a change of ownership of the Property occurs?

Answer

Yes.

Question 3

Will the Commissioner exercise the discretion to remit any shortfall interest charges or general interest charges imposed where the Owner and Primary Beneficiaries amend their assessments for the 2024 income year within 30 days of settlement of the Property to include a capital gain from the sale of the Property?

Answer

Decline to rule.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20YY

The scheme commenced on:

1 June 20XX

Relevant facts and circumstances

A trust (Owner) is the registered proprietor of Property which it acquired after 20 September 1985.

The Owner and entered into a Put and Call Option over the Property (Option Agreement) with a Purchaser.

The Purchaser exercised the Call Option to purchase the Property in accordance with the Option Agreement in the 20XX income year. Accordingly, the Owner and the Purchaser entered into the Contract for Sale for the Property at this time.

The settlement of the Contract of Sale will not occur until the 20YY income year.

The trustee for the Owner has passed a resolution to recognise any capital gains from the sale of the Property under the Contract for Sale as distributable trust income and specifically entitle the Primary Beneficiaries to any capital gains in their respective proportionate share of the distributable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

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

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

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

Income Tax Assessment Act 1997 section 104-10(4)

Tax Administration Act 1953 section 357-110

Reasons for decision

Question 1

Summary

CGT event A1 happened under section 104-10 of the ITAA 1997 when the Owner entered into the Contract of Sale upon the Purchaser exercising the Call Option over the Property.

Detailed reasoning

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

Subsection 104-10(2) of the ITAA 1997 provides that 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. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Subsection 104-10(3) of the ITAA 1997 provides that the time of CGT event A1 is when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs.

A legislative example is provided in section 104-10(3) as follows:

Example:

In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.

The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).

Note 1 to subsection 104-10(3) of the ITAA 1997 states that if the contract falls through before completion, this event does not happen because no change in ownership occurs.

Where a transaction is entered into to dispose an asset as a result of the exercise of an option, Capital Gains Tax Determination TD 16 Capital Gains: What is the date of acquisition (or date of disposal) of an asset acquired (or disposed of) on the exercise of an option? provides that the disposal date of the asset is the date of the exercise of the option, and not date the option was granted.

Paragraph 5 of Taxation Ruling TR 94/29 Income tax: capital gains tax consequences of a contract for the sale of land falling through confirms that completion of an ordinary contract for the sale of land normally takes place at the time of settlement. At this point intime the purchaser hands over the balance of the purchase monies and the vendor delivers the transfer or some similar instrument together with the title deeds. Generally speaking, the purchaser also obtains possession of the land at this time under a cash contract.

Although TR 94/29 refers to repealed provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the Commissioner's views apply equally to the equivalent provisions of the ITAA 1997.

In this situation, the Owner and the Purchaser entered into the Option Agreement over the Property. In the 20XX income year, the Purchaser exercised the Call Option to purchase the Property. In accordance with TD 16, the Owner entered into the Contract of Sale for the disposal of the Property when the Purchaser exercised the Call Option.

Consequently, CGT event A1 happened under section 104-10 of the ITAA 1997 when the Owner entered into the Contract of Sale upon the Purchaser exercising the Call Option over the Property.

Question 2

Summary

The Owner and Primary Beneficiaries are required to include a capital gain or loss from CGT event A1 in their assessable income in the income year the contract to sell the Property was entered into.

Detailed reasoning

Section 102-5 of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year as worked out in accordance with that section. Section 102-20 provides that you make a capital gain or capital loss only if a CGT event happens. The gain or loss is made at the time of the event.

As previously discussed, CGT event A1 will happen when you enter into a contract to dispose a CGT asset. The timing of that event is when you enter into the contract for the disposal.

Paragraph 1 of Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or 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? states that where a 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.

However, paragraph 3 of TD 94/89 explains that 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. If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.

In this situation, the Owner entered into the contract for the disposal of the Property in the 20XX income year but settlement will not occur until the 20YY income year.

After settlement of the Property occurs in the 20YY income year, the Owner and the Primary Beneficiaries are required to include any capital gain or capital loss in the year of income in which the contract was made, being the 20XX income year. That is, although they must include the capital gain in the income year in which the contract was made, this is not required until settlement occurs.

Where an assessment has already issued for the 20XX income year, the Owner and Primary Beneficiaries will need to amend their assessments to include the capital gain or loss once settlement occurs in the 20YY income year.

Although not a requirement, for convenience, capital gains or losses can be reported prior to settlement in the income year in which the contract was entered into in accordance with paragraph 4 of TD 94/89.

Question 3

Summary

The Commissioner declines to rule on this question as it requires the Commissioner to rule based on assumptions about future events or other matters (section 357-110 Tax Administration Act 1953).

As the guidance in paragraph 5 of TD 94/89 explains, where an assessment is amended to include a net capital gain and a liability for interest arises, the remission of interest will be dealt with in each case on its own merits.

The Commissioner's discretion to remit interest would ordinarily be exercised to remit the interest in full where requests for amendment are lodged, and where relevant, self-amendments are made, within a reasonable time after the date of settlement. In most cases, we would consider a period of one month after settlement to be reasonable period.

The Commissioner is unable to make any decision on the remission of interest charges and/or penalties until such a time as a liability for interest and/or penalties arise. If interest charges or penalties do arise, a taxpayer is able to request a remission of these by following the relevant process that is in place and published on the ATO website at the time that they arise.