Private ruling: CGT – Disposal of an asset
Date of advice: 27 September 2018
Published: November 2018
Ruling period: 1 July 20XX – 30 June 20XX
Date scheme commenced: 31 July 20XX

Ruling: Q1: Does the entry into the contract on the sale of the property give rise to CGT event A1? | A1: Yes | Q2: Will capital gains tax (CGT) event A1 happen when the disposal contract is entered into? | A2: Yes | Q3: Does the Main Residence exemption apply to the disposal of the property? | A3: Yes

Relevant facts and circumstances: On XX/XX/XXXX you and your spouse purchased land as joint owners. At the time of purchase your intention was to construct a dwelling to use as your main residence and further your hobbies. Since you acquired the property you have lived in it continuously and have not used it for primary production purposes or to produce any other type of income. Over time, you have obtained permits and constructed a shed and other facilities to develop your interest in harness racing and horse trotting. You had no intention to sell your residence until you were approached in 20XX by to sell your property under a single contract of sale. On XX/XX/20XX you appointed XXX as your agent exclusively for 30 days to negotiate with xxx. On XX/XX20XX you signed a Heads of Agreement (HOA) which was not signed by the purchaser and the sale was stated as being to a different entity, xxx xxxxxx xx xx. On XX/XX/20XX you signed a formal contract of sale, with terms included, with xxx. The agreed price of $XXXXXXX was to be paid in X instalments of $XXXXXX over X years with the balance payable upon settlement. It was agreed settlement would occur in XX/20XX, the anniversary of the date of sale however it may occur sooner if agreed by both parties. You do not intend to transfer the title of the property to xxx until contractually required to. Under the terms of the contract xxx does not have the right to possess or occupy, or use and enjoy, the property prior to settlement. xxx does however have a license to access the property and use reasonable endeavours to cause minimal disturbance to you when they exercise this right.

Relevant legislative provisions: ITAA 1997 subdivision 118-B | ITAA 1997 subsection 118-120(2) | ITAA 1997 subsection 104-10 (3) | ITAA 1936 subsection 170(10AA)

Reasons for decision: Summary: All assets are subject to the CGT rules unless they are specifically excluded. An A1 event occurs upon disposal of a CGT asset and where there is no agreement which gives the purchaser the right to use and enjoyment of the property prior to settlement. In the facts provided by you we consider this to be an A1 event and therefore are subject to CGT. In the case of real estate, a CGT event generally occurs on the date you enter into the contract, not when you settle. The fact that a contract is subject to a condition generally doesn't affect this date. However, there are provisions which allow you to defer or roll over a capital gain you make when a CGT event occurs. In your case, the contract for sale of the land was signed during the 20XX income year. Various instalments will be made until the final settlement payment is made in the 20XX year or earlier. Therefore, the date of the disposal of the property will be in the 20XX income year, and a capital gain or loss will be derived by you in that year. Accordingly, you are not required to include any capital gain or loss in the appropriate year until settlement occurs. The general rule is that you must make a choice to defer or roll over your capital gain by the day you lodge the tax return for the 20XX year. The way you prepare your tax return is sufficient evidence of the choice. You are then required to include any capital gain or loss in the 20XX income tax return, the year the contract was made. If an assessment has already been made for 20XX you may need to have that assessment amended. Subsection 170(10AA) of the Income Tax Assessment Act 1936 lists a number of situations where the two year period of review does not apply, and the Commissioner may amend the assessment at any time. Item 30 of the table allows the Commissioner unlimited time to amend an assessment to give effect to section 104-10 (3) of the Income Tax Assessment Act 1997, namely the occurrence of a CGT disposal when a change of ownership occurs. 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? explains in Paragraph 5 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. Land adjacent to a dwelling qualifies for the main residence exemption if it and the dwelling used as the main residence are sold together and both of the following apply: ● during the period you owned it, you used the land mainly for private and domestic purposes in association with the dwelling, and ● the total area of the adjacent land and the land on which the dwelling stands is not more than two hectares (4.94 acres). The land a dwelling is actually on, is included as part of the dwelling and is not part of adjacent land. In your circumstances you are entitled to the Main Residence exemption as you have sold the dwelling and adjacent land together and it has only been used for private purposes. As it is greater than two hectares however, you can choose which two hectares, including the land the dwelling is on, are exempt. The remainder is subject to CGT. | Detailed Reasoning - This ruling applies for the following period:: 1 July 20XX – 30 June 20XX | Detailed Reasoning - The scheme commences on:: 31 July 20XX | Detailed Reasoning - Relevant facts and circumstances: On XX/XX/XXXX you and your spouse purchased land as joint owners. At the time of purchase your intention was to construct a dwelling to use as your main residence and further your hobbies. Since you acquired the property you have lived in it continuously and have not used it for primary production purposes or to produce any other type of income. Over time, you have obtained permits and constructed a shed and other facilities to develop your interest in harness racing and horse trotting. You had no intention to sell your residence until you were approached in 20XX by to sell your property under a single contract of sale. On XX/XX/20XX you appointed XXX as your agent exclusively for 30 days to negotiate with xxx. On XX/XX20XX you signed a Heads of Agreement (HOA) which was not signed by the purchaser and the sale was stated as being to a different entity, xxx xxxxxx xx xx. On XX/XX/20XX you signed a formal contract of sale, with terms included, with xxx. The agreed price of $XXXXXXX was to be paid in X instalments of $XXXXXX over X years with the balance payable upon settlement. It was agreed settlement would occur in XX/20XX, the anniversary of the date of sale however it may occur sooner if agreed by both parties. You do not intend to transfer the title of the property to xxx until contractually required to. Under the terms of the contract xxx does not have the right to possess or occupy, or use and enjoy, the property prior to settlement. xxx does however have a license to access the property and use reasonable endeavours to cause minimal disturbance to you when they exercise this right. | Detailed Reasoning - Relevant legislative provisions: ITAA 1997 subdivision 118-B ITAA 1997 subsection 118-120(2) ITAA 1997 subsection 104-10 (3) ITAA 1936 subsection 170(10AA)