We recently received the following question and scenario:
I have just signed the sales contract on 31st May 2021, however the purchaser has requested delayed settlement until 1 December 2022, with standard terms 10% on exchange and the balance on settlement? The taxable gain is significant, when do I include the gain in my tax return?
- 30 June 2021 (year of exchange)?
- 30 June 2023 (year of settlement)?
- Some other time?
It is well understood that for CGT A1, the time of the event is on entering a binding contract. This would usually be on exchange of contract.
However, what is less well understood, is that you are not actually required to include the capital gain in the income tax return until ownership has changed. This means that on settlement, you would include the gain in the year that exchange took place.
So how would it work in practice.
On exchange of contract 31 May 2021, CGT event A1 is triggered, therefore the tax year the gain is required to be disclosed in is 30 June 2021 (the 2021 tax year for 30 June returns).
When the above tax payer lodges their 30 June 2021 tax return (assume they lodge on 31 October 2021) ownership has not transferred. As a result, they wouldn’t include the capital gain in their 2021 income tax return.
Taxation Determination TD 94/89 makes this quite clear:
3. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal (subsection 160M(1)) which then triggers the operation of subsection 160U(3). When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made (subsection 160U(3)). If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.
Fast forward to 1 December 2022, when settlement occurs, what happens now?
The taxpayer on settlement and transfer of ownership would immediately amend the 30 June 2021 income tax return and include the capital gain.
Wouldn’t the Tax Office impose GIC on late payment of income tax? Generally they may, however, according to TD 94/89:
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. 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.
Therefore, a taxpayer can potentially avoid the general interest charge.
In summary it would be prudent for a taxpayer to obtain ATO confirmation, either in writing with respect to 170AA discretion. We note there are various private rulings confirming this treatment (PBR 1012755375012), which may save a taxpayer being out of pocket to fund income tax when settlement proceeds are yet to be received.
The above article was contributed by Sean Urquhart Tax Director at Nexia – Sydney Office. If you require specific taxation advice feel free to contact him direct on 02 8264-0755.
Please refer to our disclaimer. The above is general information only and should not be relied upon as taxation advice.