Private ruling: Capital gains tax
Date of advice: 14 December 2020
Published: February 2021
Ruling period: Year ending 30 June XXXX to Year ending 30 June YYYY
Date scheme commenced: 1 July WWWW

Ruling: Q1: Is the capital gain from the sale of the properties by the Company assessable in the income year in which the contract for sale is entered into where the settlement date specified in the contract for sale is in a later year of income, or settlement is triggered by an action of the purchaser at an earlier date in a later year of income? | A1: Yes | Q2: On the basis the answer to the question 1 is yes and provided the amendment occurs within one month of settlement, will the Commissioner of Taxation confirm there will be no penalties, GIC, SIC or any other interest charge applied in respect of the payment of additional tax arising out of the amended assessment provided that tax is paid by the due date on the amended assessment? | A2: Remission of interest is dealt with in each case on its own merits but if the amendment for the correct amount occurs within one month of settlement then penalties would not be applied, and the Commissioner would ordinarily remit any interest charges.

Relevant facts and circumstances: The applicant ('the Company') is an Australian private company which was incorporated on XX/YYY/ZZZZ. In the year ending 30 June AAAA the Company purchased two adjoining rural properties. All of the shares in the Company are owned by a resident unit trust ('the Unit Trust'). The ownership interests of the issued units in the Unit Trust are owned by three siblings, as follows: I. Sibling 1 (an Australian resident) - 50% - through a resident family discretionary trust. II. Sibling 2 (a non-resident) - 25%. III. Sibling 3 (a non-resident) - 25%. Subsequently Sibling 1 died and their surviving partner the role of sole director of the Company on Sibling 1's death. The two non-resident siblings maintain their ownership interests. Since the properties were purchased, they have been rented to locals at commercial rates. Years later it was agreed between the relevant parties that the properties should be sold, and the net sale proceeds paid out to the shareholders. Shortly after it was agreed that the properties should be sold, the local government authority announced that the region had been designated as an urban growth area to be a future residential township. As a result, the value of the properties increased substantially. The properties were subsequently sold on a deferred settlement basis. A Heads of Agreement for the sale of the properties was signed in the following year, the WWW financial year, with the purchaser at an agreed price of $X. A Contract of Sale of Real Estate for the sale of the properties was subsequently signed in the XXXX financial year for the agreed price of $X. The balance of a deposit of $Y stipulated under the contract of sale was paid to the seller subsequent to the signing of the contract. Under the contract of sale, the balance of the purchase price is payable by instalments over a period of M years with the final payment due in the YYYY financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ection 104-10 | Taxation Administration Act 1953 s ection 8AAB | Taxation Administration Act 1953 s ection 8AAG

Reasons for decision: Summary: In your case, the contract for sale of the land was signed in the XXXX financial year. Various instalments will be made until the final settlement payment is made in the YYYY financial year. Therefore, the date of the disposal of the property will be in the XXXX financial year, and a capital gain will be derived by you in the YYYY financial year. You are required to include the capital gain in your return for the XXXX financial year; however, you do not need to include that capital gain until settlement occurs, that is, after you receive the final settlement payment in the YYYY financial year. You will need to amend your XXXX financial year tax return once this final settlement payment is received. If settlement is triggered at an earlier time than the date specified in the contract for sale by the action of the purchaser, the settlement of the contract will also effect a change of ownership and disposal of the properties. As in the situation where settlement occurs on the date specified in the contract of sale, when settlement occurs you are required to include any capital gain or capital loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, you may need to have that assessment amended. | Detailed Reasoning - Detailed reasoning: You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening to an asset in which you have an ownership interest. You dispose of an asset when a change of ownership occurs from you to another entity. When property is disposed of under a contract, CGT event A1 occurs. The time of the event is when the contract is entered into. Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? provides the Commissioner's view as to the year of income you are required to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income. TD 94/89 refers to repealed subsection 160U(3) of the Income Tax Assessment Act 1936 (ITAA 1936). It was replaced by paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) which has the same meaning as the repealed section. Therefore, the Commissioner's views expressed in TD 94/89 apply equally to the equivalent provisions of the ITAA 1997. TD 94/89 provides that where the contract is settled in a later year of income, you are required to include a capital gain or capital loss in the year of income in which the contract is made, not in the year of income in which the contract is settled. However, you are not required to include any capital gain or capital loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal. When settlement occurs, you are required to include any capital gain or capital loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, you may need to have that assessment amended. Although it is not required, you may, for convenience, include the capital gain or capital loss from the disposal of the land in your return for the income year in which the contract was entered into if you lodge that return before settlement occurs. In your case, the contract for sale of the land was signed in the XXXX financial year. Various instalments will be made until the final settlement payment is made in the YYYY financial year. Therefore, the date of the disposal of the property will be in the XXXX financial year, and a capital gain will be derived by you in the YYYY financial year. You are required to include the capital gain in your return for the XXXX financial year; however, you do not need to include that capital gain until settlement occurs, that is, after you receive the final settlement payment in the YYYY financial year. You will need to amend your XXXX financial year tax return once this final settlement payment is received. If settlement is triggered at an earlier time than the date specified in the contract for sale by the action of the purchaser, the settlement of the contract will also effect a change of ownership and disposal of the properties. As in the situation where settlement occurs on the date specified in the contract of sale, when settlement occurs you are required to include any capital gain or capital loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, you may need to have that assessment amended. | Detailed Reasoning - Question 2: On the basis the answer to the question 1 is yes and provided the amendment occurs within one month of settlement, will the Commissioner of Taxation confirm there will be no penalties, GIC, SIC or any other interest charge applied in respect of the payment of additional tax arising out of the amended assessment provided that tax is paid by the due date on the amended assessment? | Summary: Remission of interest is dealt with in each case on its own merits but if the amendment for the correct amount occurs within one month of settlement then penalties would not be applied, and the Commissioner would ordinarily remit any interest charges. | Detailed Reasoning - Detailed reasoning: TD 94/89 states that where an assessment is amended to include a net capital gain, and a liability for interest arises under subsection 170AA(1), the remission of interest will be dealt with in each case on its own merits. Further, we would expect however, that the discretion in subsection 170AA(11) would ordinarily be exercised to remit the interest in full where requests for amendment are lodged, and where relevant, self-amendments are made, within a reasonable time after the date of settlement. In most cases, we would consider a period of one month after settlement to be a reasonable period. TD 94/89 refers to repealed subsections 170AA(1) and 170AA(11) of the Income Tax Assessment Act 1936 (ITAA 1936). These provisions were replaced by sections 8AAB and 8AAG of the Taxation Administration Act 1953 (TAA) which have the same meaning as the repealed subsections. Therefore, the Commissioner's views expressed in TD 94/89 apply equally to the equivalent provisions of the TAA. The remission of interest is dealt with in each case on its own merits. If you amend the 2017 income tax return within one month (30 days) of settlement of the sale of the property, the interest charges applicable due to the amendment would ordinarily be remitted as per TD 94/89. If the assessment is amended by the correct amount, then no penalties will ordinarily be applied.