ATO Interpretative Decision
ATO ID 2011/45
Income Tax
CGT small business concessions: basic conditions - CGT event happening in relation to a CGT asset - granting an optionFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
If CGT event D2 (about granting, renewing or extending an option) in section 104-40 of the Income Tax Assessment Act 1997 (ITAA 1997) happens, does that event happen 'in relation to' the asset in respect of which the option is granted (the underlying asset) therefore satisfying paragraph 152-10(1)(a) of the ITAA 1997?
Decision
Yes. A capital gain made from CGT event D2 happening will qualify for small business CGT relief on the basis that the CGT event happens 'in relation to' the underlying asset, therefore satisfying paragraph 152-10(1)(a) of the ITAA 1997.
Facts
The taxpayer owns land.
The taxpayer grants an option to a third party to acquire the land as consideration for the third party paying the taxpayer a lump sum.
The third party does not exercise the option.
Reasons for Decision
CGT event D2 in section 104-40 of the ITAA 1997 happens when a taxpayer grants an option to an entity, or renews or extends an option they had granted. A capital gain or loss may arise from the CGT event happening.
If the basic conditions under section 152-10 of the ITAA 1997 are satisfied, the taxpayer may be eligible to reduce the capital gain resulting from the CGT event using the small business concessions.
The first condition in paragraph 152-10(1)(a) of the ITAA 1997 requires that the CGT event happens in relation to a CGT asset of the taxpayer. The fourth condition in paragraph 152-10(1)(d) of the ITAA 1997 requires that the CGT asset satisfies the active asset test.
With respect to the first condition it is considered the words 'in relation to' in paragraph 152-10(1)(a) of the ITAA 1997 are wide enough to allow reference to an underlying asset such as the land in relation to which the option has been granted. They are also wide enough to allow reference to land in relation to which an option to acquire an easement over the land has been granted.
Therefore, if CGT event D2 happens, that event can be said to happen in relation to a CGT asset of the taxpayer, being the land in relation to which the option has been granted, and accordingly paragraph 152-10(1)(a) of the ITAA 1997 can be satisfied.
Year of income: Year ended 30 June 2011
Legislative References:
Income Tax Assessment Act 1997
section 104-40
section 152-10
paragraph 152-10(1)(a)
paragraph 152-10(1)(d)
ATO ID 2004/650
Keywords
Active asset
Basic conditions for relief
Capital gains tax
CGT events D1-D3 - bringing into existence a CGT asset
CGT event D4 - entering into a conservation covenant
CGT small business relief
Date reviewed: 24 October 2017
ISSN: 1445 - 2782