ATO ID 2006/224: Sale of an interest in an afforestation project: deed of assignment
Date of decision: 12 July 2006
Year of income: Year ended 30 June 2004 Year ended 30 June 2006
Business line: Public Groups and International

Issue
Can section 118-20 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to reduce the capital gain made from the disposal of a capital gains tax (CGT) asset, to the extent that an amount has been assessed to the taxpayer under section 70-90 of the ITAA 1997 on the disposal of trading stock when they entered into a deed of assignment under Part X of the Bankruptcy Act 1966 ?

Decision
Yes. Section 118-20 of the ITAA 1997 can apply to reduce the capital gain from the disposal of the CGT asset to the extent an amount is assessed to the taxpayer under section 70-90 of the ITAA 1997 when they entered into a deed of assignment under Part X of the Bankruptcy Act 1966 .

Facts
The taxpayer acquired an interest in woodlots from an afforestation project. A product ruling issued in relation to the afforestation project determining that the growers' afforestation activities constitute the carrying on of a business with the woodlots being the growers' trading stock. Later, the taxpayer became insolvent and entered into a deed of assignment under Part X of the Bankruptcy Act 1966. Under the deed of assignment, all divisible property was assigned to the trustee, upon trust, to deal with it for the benefit of the taxpayer's creditors. The assignment of the woodlots to the trustee constituted the disposal of trading stock outside the ordinary course of a business and the market value of the woodlots was included in the taxpayer's assessable income under section 70-90 of the ITAA 1997. The trustee did not hold the woodlots as trading stock. The creditors resolved that the trustee should seek to secure a buyer for the interest in the woodlots prior to their maturation. The trustee sold the woodlots in 2003-04 income year.

Reasons for decision
Summary: Ordinarily a capital gain or capital loss made from the disposal of a CGT asset that is your trading stock is disregarded under section 118-25 of the ITAA 1997. However, subsection 106-30(1) of the ITAA 1997 states that for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997, the vesting of an individual's CGT assets in the trustee under the Bankruptcy Act is ignored. The Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill of 1986 explaining section 160W of the Income Tax Assessment Act 1936 (the equivalent provision to section 106-30 of the ITAA 1997) stated that: The effect of this section is that the asset is still considered to be owned by the insolvent person or company, notwithstanding that the asset is vested in a trustee or liquidator. Accordingly, no disposal takes place on the vesting of the asset in the trustee or liquidator but a disposal of the asset by the trustee or liquidator is considered to be a disposal by the insolvent person or company. Therefore, the intent of section 106-30 of the ITAA 1997 is to ensure that the ownership of a CGT asset does not transfer to the trustee of a bankruptcy estate for the purposes of applying Parts 3-1 and 3-3 of the ITAA 1997. Accordingly, no CGT event happens to the bankrupt taxpayer when the woodlots are vested in the trustee of the bankruptcy estate. Under subsection 106-30(2) of the ITAA 1997, the acts of the trustee under a deed of assignment under Part X of the Bankruptcy Act 1966 are treated as if they had been done by the bankrupt taxpayer. Accordingly, CGT event A1 in subsection 104-10(1) of the ITAA 1997 happens to the bankrupt taxpayer when the trustee sells the woodlots. Under section 118-25 of the ITAA 1997, the CGT asset must be your trading stock at the time of the CGT event. As the woodlots, because of section 70-90 of the ITAA 1997, were no longer trading stock when CGT event A1 happens, section 118-25 will not apply to disregard the capital gain or capital loss made by the bankrupt taxpayer. Consequently, the capital gain made by the bankrupt taxpayer from the disposal of the woodlots includes an amount that was included in the bankrupt taxpayer's assessable income under section 70-90 of the ITAA 1997 when the bankrupt taxpayer entered into the deed of assignment. Under subsection 118-20(1) of the ITAA 1997 as extended by subsection 118-20(1A) of the ITAA 1997, an amount included in your assessable income in relation to a CGT asset will be treated as being included in your assessable income because of the CGT event. Accordingly, the anti-overlap provision in section 118-20 of the ITAA 1997 can apply to reduce the capital gain made by the bankrupt taxpayer from the disposal of the woodlots by the amount that is assessed as trading stock under section 70-90 of the ITAA 1997 when the woodlots are vested in the trustee.

Legislative references: Income Tax Assessment Act 1997 section 70-90 section 106-30 section 118-25 subsection 104-10(1) subsection 118-20(1) subsection 118-20(1A) paragraph 104-10(3)(a) paragraph 106-30(2)(b)
Related public rulings and determinations: Taxation Ruling TR 95/6 | Taxation Ruling IT 175 | Taxation Determination TD 98/23
Subject references: Capital gains Crops as trading stock Insolvency Ownership, interests, control & rights Part X bankruptcy arrangements Trading stock