ATO ID 2003/638: CGT: Capital proceeds payable by instalments - not all received - application of CGT event C2
Date of decision: 14 October 2002
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Where the 'consideration in respect of the disposal of an asset' is payable by instalments over time, does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the debt owing to the vendor if the vendor later agrees to a reduction in the amount owing?

Decision
Yes. CGT event C2 in section 104-25 of the ITAA 1997 will happen to the debt owing to the vendor, upon the vendor agreeing to accept a lesser amount.

Facts
In 1995 the taxpayer entered into a contract for the sale of an asset to an unrelated purchaser. The selling price under the contract was payable in ten equal annual payments with interest on the unpaid balance from time to time. The contract was completed on the day it was entered into, and at that time, the vendor was required to transfer to the purchaser the asset and any documentation that the vendor held in respect of the asset. The balance of the purchase price owing was subject to certain discounts if the purchaser elected to pay out the balance of its obligations under the contract earlier than the due date. The purchaser made the required annual payments and there was no indication they would not continue to do so. In 2001, the vendor taxpayer sought out the purchaser and initiated negotiations for the payment of the outstanding balance. This resulted in the vendor agreeing that the purchaser would satisfy the remaining obligations under the contract by paying (in two equal payments) an amount that was less than the amount the vendor was entitled to, and also less than the amount that would have applied if the relevant discount had been taken up at that time by the purchaser. As a result, the disposal consideration received by the taxpayer was less than the amount in the contract upon which the capital gain made from the disposal was calculated.

Reasons for decision
Summary: CGT event C2 in section 104-25 of the ITAA 1997 happens if a person's ownership of an intangible CGT asset ends in certain ways. The debt owing to the vendor is an intangible CGT asset (section 108-5 of the ITAA 1997 Note 1). The action of the vendor in agreeing to accept a lesser amount than that which they were entitled to, results in the debt owing to the vendor being released, discharged or satisfied and accordingly results in CGT event C2 happening under subsection 104-25(1) of the ITAA 1997. Whether a capital gain or capital loss is made from CGT event C2 happening to the debt owing to the vendor, will depend on the calculation of the cost base of that debt and the capital proceeds from the CGT event. If the capital proceeds received from CGT event C2 happening to an asset are less than the market value of the asset, those proceeds are replaced with the market value of the asset as at the time of the event (subsection 116-30(2) of the ITAA 1997). The market value is worked out as if the event had not occurred and was never proposed to occur (subsection 116-30(3A) of the ITAA 1997). In this particular case, the capital proceeds from CGT event C2 happening to the debt owing to the vendor is the new reduced amount the vendor is entitled to receive. If that reduced amount is less than the market value of the debt previously owing to the vendor, then the capital proceeds are replaced with that market value. The ways in which a taxpayer may obtain acceptable valuations for CGT purposes can be found in Taxation Determination TD10.

Legislative references: Income Tax Assessment Act 1997 section 104-25 subsection 104-25(1) section 108-5 subsection 116-30(2) subsection 116-30(3A)
Related public rulings and determinations: TD 10
Related ATO interpretative decisions: ATO ID 2003/635 | ATO ID 2003/636 | ATO ID 2003/637
Subject references: Capital gains tax Capital proceeds