Private ruling: CGT – timing of event
Date of advice: 21 May 2018
Published: July 2018
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: When land is disposed of under a contract is the capital gain included in your assessable income for the income year in which the contract was entered into? | A1: Yes | Q2: Are you required to include the above capital gain in your assessable income for the relevant income year before an actual change of ownership occurs? | A2: No | Q3: When a change of ownership occurs in a later income year and the assessment from an earlier income year is amended by you to include the capital gain, will the Commissioner remit any interest imposed when the assessment is amended if the amendment request is lodged within 30 days after settlement occurs? | A3: Yes

Relevant facts and circumstances: You sold a property to a third party. The sale proceeds were paid by instalments in the 20XX and 20XX income years. Title in the property sold did not transfer until the settlement date.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Taxation Administration Act 1953 Schedule 1, Section 280-100 | Taxation Administration Act 1953 Schedule 1, Section 280-160

Reasons for decision: Detailed Reasoning - Timing of CGT event: 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 (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997). The time of the event is when the contract is entered into. Taxation Determination TD 94/89 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 TD 94/89 refers to repealed subsection 160U(3) of the Income Tax Assessment Act 1936 (ITAA 1936). It was replaced by paragraph 104-10(3)(a) of the ITAA 1997 which has the same meaning as the repealed section.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 income year ended 30 June 20XX. Various instalments were paid in the 20XX and 20XX income years. Therefore a capital gain will be derived by you in the 20XX income year. You are required to include the capital gain in your return for the 20XX income year, however you do not need to include that capital gain until settlement occurs, that is, after you receive the final settlement payment. | Detailed Reasoning - Remission of interest: Under subsection 280-100(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) you are liable to pay shortfall interest charge (SIC) on an additional amount of income tax that you are liable to pay because the Commissioner amends your assessment for an income year. The SIC which applies on a daily compounding basis replaces the previous liability to pay the general interest charge during the shortfall period. According to subsection 280-100(2) of Schedule 1 to the TAA, the shortfall period extends from the due date for payment of the earlier, understated assessment to the end of the day before the day on which the Commissioner gives you notice of the amended assessment. Under subsection 280-160(1) of Schedule 1 to the TAA, the Commissioner may remit all or part of an amount of SIC if the Commissioner considers it fair and reasonable to do so. Without limiting subsection (1), the Commissioner in deciding whether to remit must, under subsection (2), have regard to: a) the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the SIC; and b) the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of the delayed payments. The Commissioner's guidelines on the remission of SIC are outlined in Law Administration Practice Statement PS LA 2006/8. Paragraph 35 of PS LA 2006/8 states that the extent of the remission must take into account the individual circumstances of a case and the extent to which factors beyond your control were responsible for the size and duration of the shortfall. It states at Paragraph 40 that the SIC and GIC (interest charges) are intended to restore a fair balance between taxpayers, ensuring that taxpayers who have paid tax on time are not disadvantaged relative to those who had the benefit of the tax shortfall until the amended assessment. Paragraph 5 of TD 94/89 explains that where an assessment is amended to include a net capital gain in the abovementioned circumstances, the discretion to remit general interest charge would ordinarily be exercised providing requests for amendments are made within a reasonable time after the date of settlement. According to TD 94/89 a reasonable time is considered to be a period of one month after settlement. In your case, it is considered that the fact that settlement will not occur until a later income year is beyond your control. It is therefore appropriate for the Commissioner to remit the SIC provided the amendments are lodged within one month of settlement occurring. Information on how to apply for remission of interest can be found at ato.gov.au.