ATO ID 2002/941: Capital gains tax - time of CGT event C2
Date of decision: 26 June 2002
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Is the timing of CCT event C2 determined by reference to paragraph 104-25(2)(b) of the Income Tax Assessment Act 1997 ('ITAA 1997'), where a payment is received under an indemnity acquired as part of the capital proceeds of an earlier CGT event?

Decision
Yes. The timing of CGT event C2 is determined by reference to paragraph 104-25(2)(b) of the ITAA 1997 when a payment is received under an indemnity, as the indemnity is considered to be discharged or satisfied at that time.

Facts
The taxpayer entered into a contract to sell a CGT asset. Under the terms of the contract the taxpayer received cash and several other benefits in return for the CGT asset. The benefits included an indemnity against specified future costs. A payment has now been received under the indemnity.

Reasons for decision
Summary: Paragraph 104-25(1)(b) of the ITAA 1997 states that CGT event C2 happens to an intangible asset when it is released, discharge or satisfied. It is therefore necessary to consider when an indemnity is discharged. Subsection 104-25(2) of the ITAA 1997 specifies that the time that a CGT event C2 occurs is: 'The time of the event is: (a) when you enter into the contract that results in the asset ending; or (b) if there is no contract - when the asset ends.' The full Federal Court in FCT v. Dulux Holdings Pty Ltd & Orica Ltd [2001] FCA 1344; 2001 ATC 4658; (the Orica Case ) held that a chose in action was created by the contract and the due performance of the contract gave rise a deemed disposal. Accordingly, the deemed change in ownership took place not under the original contract, but on the progressive discharge of the chose in action. The Court held that subsection 160U(3) of the Income Tax Assessment Act 1936 (ITAA 1936) did not apply. However, subsection 160U(4) of the ITAA 1936 did apply to make the time of the disposal the time of each payment. (Note: In respect of CGT event C2 paragraph 104-25(2)(a) of the ITAA 1997 is the equivalent of subsection 160U(3) of the ITAA 1936. In respect of CGT event C2 paragraph 104-25(2)(b) of the ITAA 1997 is the equivalent of subsection 160U(4) of the ITAA 1936) The application of the principles established in the Orica Case mean that the timing of CGT event C2 is when payments under the indemnity are made and not when the original contract was entered into. At the time of the payment the indemnity ends by the asset being discharge or satisfied.

Legislative references: Income Tax Assessment Act 1997 paragraph 104-25(1)(b) subsection 104-25(2) paragraph 104-25(2)(a) paragraph 104-25(2)(b)
Case references: FC of T v. Dulux Holdings Pty Ltd & Orica Ltd [2001] FCA 1344 2001 ATC 4658
Related ATO interpretative decisions: ATO ID 2002/958
Subject references: Capital gains tax CGT assets CGT events C1-C3 - end of a CGT asset