Edited version of private advice

Authorisation Number: 5010062843436

Date of advice: 17 September 2019

Ruling

Subject: Income tax - capital gains tax

Where the contract for a CGT asset is settled in a later year of income, you are required to include a capital gain or capital loss in the year of income in which the contract is made. However, you are not required to include any capital gain or capital loss in the appropriate year until an actual change of ownership occurs.

Question 1

Is the capital gain from the sale of the land assessable in the income year in which the contract was entered into?

Answer

Yes

Question 2

Are you required to include the capital gain from the sale of the property in your assessable income, for the relevant income year, before a change of ownership occurs?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

You purchased land with other parties.

You have signed a contract to sell this land and this will be paid over a period of several years.

The land title will not transfer until the final settlement payment is made.

You will amend your XXXX financial year tax return once the final settlement payment is made in the financial year ending XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening to an asset in which you have an ownership interest.

You dispose of an asset when a change of ownership occurs from you to another entity. When property is disposed of under a contract, a CGT event A1 occurs. The time of the event is when the contract is entered into.

Taxation Determination 94/89 (TD 94/89) provides the Commissioner's view as to the year of income you are required to include a capital gain or loss, where land disposed of under a contract which is made in one year of income, but settled in a later year of income.

TD 94/89 refers to repealed subsection 160U (3) of the Income Tax Assessment Act 1936 (ITAA 1936). This was replaced by paragraph 104-10(3) (a) of the Income Tax Assessment Act 1997 (ITAA 1997) which has the same meaning as the repealed section. Therefore the Commissioners views expressed in TD 94/89 apply equally to the equivalent provisions of the ITAA 1997.

TD 94/89 provides that where the contract is settled in a later year of income, you are required to include a capital gain or capital 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, you are not required to include any capital gain or capital loss in the appropriate year until an actual change of ownership occurs.

After settlement of the CGT asset, you are required to include any capital gain or capital loss in the year of income in which the contract was made. Where an assessment has already been made for that year of income, you may need to have that assessment amended (Paragraph 3, TD 94/89).

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 (Paragraph 4, TD 94/89).

In your case, the contract for sale of the land was signed in year one. Various instalments will be made until the final settlement payment is made in year eight. The date of the disposal of the property will be year one, deriving a capital gain in that financial year; however this will need to be reported until after settlement occurs.