ATO Interpretative Decision
ATO ID 2008/147
Income Tax
Capital gains tax: vendor cancellation of contract - compensation payment - preserving ownership rightsFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Can the taxpayer include in the fifth element of the cost base under subsection 110-25(6) of the Income Tax Assessment Act 1997 (ITAA 1997) and the reduced cost base under subsection 110-55(2) of the ITAA 1997 of a CGT asset they own, an amount of damages paid to a potential purchaser upon the potential purchaser's acceptance of the termination of a contract to sell the asset following repudiation of the contract by the taxpayer?
Decision
Yes. The payment of damages can be included as part of the fifth element of cost base of the CGT asset under subsection 110-25(6) of the ITAA 1997 and the fifth element of the reduced cost base of the CGT asset under subsection 110-55(2) of the ITAA 1997.
Facts
The taxpayer entered into a contract for the sale of a CGT asset.
Subsequently they changed their mind and asked the potential purchaser to agree to terminate the contract.
The potential purchaser agreed to terminate the contract upon the payment by the taxpayer of an amount of damages.
Reasons for Decision
The fifth element of the cost base, under subsection 110-25(6) of the ITAA 1997, is capital expenditure that you incurred to establish, preserve or defend your title to the asset or a right over the asset.
The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW defines 'preserve' to include ' 4. to keep possession of; retain.'
The expenditure (the amount of damages) was incurred so that the taxpayer could retain title to the CGT asset. It was the amount paid so that the potential purchaser would agree to termination of the contract as opposed to enforcing the taxpayer's performance of the contract. The effect of termination was that the title to the CGT asset remained with the taxpayer.
Accordingly, the expenditure is included in the fifth element of the cost base of the CGT asset.
Subsection 110-55(2) of the ITAA 1997 provides that all of the elements (except the third one) of the reduced cost base are the same as those for the cost base. The expenditure is thus included in the fifth element of the reduced cost base of the CGT asset.
Date of decision: 4 November 2008Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
subsection 110-25(6)
subsection 110-55(2)
Keywords
Breach of contract
Capital gains tax
CGT cost base
CGT reduced cost base
Contract law
Law, litigation & legislation
Date reviewed: 17 May 2017
ISSN: 1445-2782