Private ruling: Timing of CGT event A1
Date of advice: 8 September 2017
Published: January 2018

Ruling: A1: Yes | Q1: As beneficiaries of the Trust for the income year ended 30 June XXXX, are Mr Z and Ms Y not required to include their share of the capital gain referred to in Question 1 in their assessable income for that year until an actual change of ownership occurs? | A2: Yes | Q2: Will the amendment of assessments in respect of the income year ended 30 June XXXX for Mr Z and Ms Y for the purpose of giving effect to subsection 104-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) be within the relevant period of review pursuant to subsection 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes | Q3: Where Mr Z and Ms Y lodge a request to amend their assessments in respect of the income year ended 30 June XXXX to include their respective share of the capital gain within a period of one month after a change of ownership occurs, will the Commissioner exercise his discretion to remit any shortfall interest charge (SIC) imposed? | A4: Yes

Relevant facts and circumstances: 1. The land was purchased by the trustee of the Trust after 19 September 1985. 2. The land is located in Australia. 3. The land was disposed of by the trustee of the Trust under a contract which was entered into and signed on XXXX for a total purchase price of $AAA. 4. Mr Z and Ms Y were beneficiaries of the Trust for the income year ended 30 June XXXX. 5. The purchase price is to be paid by six instalments over a number of years with the final payment of the outstanding balance being made on BBBB (the settlement date). 6. The land title will not transfer to the purchaser until the final payment is made, nor will the purchaser have use of the land prior to settlement. 7. The Trust made a capital gain from the disposal of the land in the income year ended 30 June XXXX. That capital gain must be included as assessable income of the trust estate derived in that year. 8. There is distributable income of the Trust that the trustee has determined is available for distribution to Mr Z and Ms Y as beneficiaries in the income year ended 30 June XXXX. 9. As beneficiaries of the Trust for the income year ended 30 June XXXX, Mr Z and Ms Y will include their share of the capital gain derived by the Trust as assessable income in that year 10. Mr Z and Ms Y will lodge a request to amend to their income tax assessments for the year ended 30 June XXXX within one month of the settlement date for the purposes of including their respective share of the capital gain made by the Trust from the disposal of the land. 11. The Trust was not a ‘small business entity’ as defined in section 328-110 of the ITAA 1997 for the income year ended 30 June XXXX. 12. The trustee of the Trust (in that capacity) was not a ‘full self-assessment taxpayer’ as defined in subsection 6(1) of the ITAA 1936 for the year ended 30 June XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 Subdivision 115-C | Income Tax Assessment Act 1997 section 115-227 | Income Tax Assessment Act 1997 section 115-228 | Income Tax Assessment Act 1997 subsection 115-228(1) | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 974-160 | Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 97(1) | Income Tax Assessment Act 1936 Division 6E | Income Tax Assessment Act 1936 section 170 | Income Tax Assessment Act 1936 subsection 170(1) | Income Tax Assessment Act 1936 paragraph 170(1)(d) | Taxation Administration Act 1953 Schedule 1 subsection 280-100(1) | Taxation Administration Act 1953 Schedule 1 subsection 280-100(2) | Taxation Administration Act 1953 Schedule 1 subsection 280-160(1)

Reasons for decision: Summary: The capital gain made by the trustee of the Trust from the disposal of land and assessable income of the trust estate in the income year ended 30 June XXXX, being the year in which the contract for disposal was entered into, is not required to be included in the assessable income of the trust estate for that year until an actual change of ownership occurs. | Detailed Reasoning - CGT Event A1: You make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest. Section 108-5 of the ITAA 1997 defines a CGT asset to be any kind or property, or a legal or equitable right that is not property. A parcel of land is a CGT asset. Under subsection 104-10(1) of the ITAA 1997 the disposal of a CGT asset causes a CGT event A1 to happen. You dispose of an asset when a change in ownership occurs from you to another entity (subsection 104-10(2) of the ITAA 1997). Subsection 104-10(3) of the ITAA 1997 provides that the timing of the event is when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs. A contract generally comes into existence at the time an offer is accepted and signed by the vendor and the purchaser. A capital gain is included in your assessable income in the income year in which the CGT event occurs, as per section 102-5 of the ITAA 1997. | Detailed Reasoning - Contract settled in later year: Taxation Determination TD 94/89(TD 94/89) provides the Commissioner's view as to the year of income you are required to include a capital gain or capital 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 provides that where the contract is settled in a later income year, you are required to include a capital gain or capital loss in the income year in which the contract is made, not in the income year 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 income year in which the contract was made. If an assessment is already made for that year of income, you may need to have that assessment amended. In the case of the Trust, as the contract for the disposal of the land was executed in the income year ended 30 June XXXX, the CGT event A1 under subsection 104-10(1) of the ITAA 1997 happened in that year, and the capital gain from that event was derived by the Trust in that year. Whilst the Trust is required to include the capital gain in its income tax return for the income year ended 30 June XXXX (as part of the calculation of its net income), it is not required to include that capital gain until such time as settlement occurs (i.e. when there is a change of ownership). | Summary: Mr Z and Ms Y, as beneficiaries of the Trust for the income year ended 30 June XXXX, are not required to include their share of the capital gain referred to in Question 1 in their assessable income for that year until an actual change of ownership occurs. | Detailed Reasoning - Detailed reasoning: For the same reasons provided in explanation to the answer to Question 1, Mr Z and Ms Y’s share of the Trust’s capital gain was derived as beneficiaries of the Trust in the year ended 30 June XXXX. However, that income is not required to be included in their assessable income for the year ended 30 June XXXX until settlement occurs (i.e. when there is a change of ownership). | Summary: The amendment of assessments in respect of the income year ended 30 June XXXX for Mr Z and Ms Y for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997 will be within the relevant period of review pursuant to subsection 170(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 170 of the ITAA 1936 outlines the situations where the Commissioner may amend an assessment. The general rule is that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual: item 1 in the table in subsection 170(1) of the ITAA 1936. However, there are a number of qualifications to the general rule. One such qualification is where the individual is a beneficiary of a trust at any time during the income year concerned: paragraph (d) in item 1 in the table in subsection 170(1) of the ITAA 1936. This means that generally the Commissioner may amend an assessment of an individual who is a beneficiary of a trust within four years after the day on which the Commissioner gives notice of the assessment to the beneficiary (four year period to amend). However, there are two exceptions to that qualification where the individual is a beneficiary of a trust at any time in the year and: - the trust is a small business entity for that year, or - the trustee of the trust (in that capacity) is a full self-assessment taxpayer. This means that the Commissioner will only have a two year period to amend if one of these two exceptions applies. As the Trust was not a small business entity for the year ended 30 June XXXX and the trustee of the Trust (in that capacity) was not a full self-assessment taxpayer in that year, neither of the exceptions apply and the qualification in paragraph (d) of item 1 in the table in subsection 170(1) of the ITAA 1936 is met. The Commissioner therefore has a four year period to amend the assessments of the individual beneficiaries, Mr Z and Ms Y, in respect of the income year ended 30 June XXXX. As the settlement date under the contract for sale of the land is BBBB and Mr Z and Ms Y will lodge the amendment request within one month of that date, the amendment of their assessments in respect of the income year ended 30 June XXXX to give effect to subsection 104-10(3) of the ITAA 1997 will be within the four year period to amend. | Summary: Where Mr Z and Ms Y lodge a request to amend their assessments in respect of the income year ended 30 June XXXX to include their respective share of the capital gain within a period of one month after a change of ownership occurs, the Commissioner will exercise his discretion to remit any SIC imposed. | Detailed Reasoning - Detailed reasoning: Under subsection 280-100(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) you are liable to pay SIC on an additional amount of income tax that you are liable to pay because the Commissioner amends your assessment for an income year. 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. Paragraph 5 of TD 94/89 explains that where an assessment is amended to include a net capital gain and a liability for interest arises in the abovementioned circumstances, the discretion to remit the 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. It is considered that the fact that settlement will not occur until BBBB is beyond Mr Z and Ms Y’s control. It is therefore appropriate for the Commissioner to grant full remission of any SIC imposed on the amended assessments for the year ended 30 June XXXX where the request for amended assessments is lodged within one month of settlement occurring.

Subject: Timing of CGT event A1: Is the capital gain made by the trustee of the Trust from the disposal of land and assessable income of the trust estate in the income year ended 30 June XXXX, being the year in which the contract for disposal was entered into, not required to be included in the assessable income of the trust estate for that year until an actual change of ownership occurs?