The timing of capital gains tax (CGT) liabilities can be a
significant impediment to facilitating real property transactions.
There are a number of ways to manage these timing issues, including
put and call options and an often overlooked ATO Tax Determination
that is particularly relevant to terms and instalment contracts. In
the current economic environment, where it has become increasingly
difficult for vendors and purchasers to access finance, why not use
the ATO as your financier?
CGT on sale of real property
Where real property is held on capital account (i.e. not as
trading stock), the sale of that property will trigger a capital
gains tax event. CGT event A1 (section 104-10 of the Income Tax
Assessment Act 1997) happens if a taxpayer "disposes of
an asset". A taxpayer disposes of an asset if "a change
of ownership occurs". Importantly, the time of CGT event A1 is
when the taxpayer "enters into the contract for the
disposal". This timing rule can have significant cash flow
implications for the vendor where entry into a sale contract and
settlement of the sale contract straddle two or more income years.
However, it is important to note that if the contract does not
settle and the disposal does not occur, CGT event A1 does not
happen (although other CGT events may occur if the purchaser's
deposit is forfeited).
ATO Taxation Determination TD 94/89
(Determination) sets out the ATO position on
"when" a capital gain must be reported in relation to
land disposed of under a contract which is made in one income year
but which is settled in a later income year. The Determination
the taxpayer is required to include the capital gain in the
year of income in which the contract is made (not settled) but
not until an actual change of ownership occurs, i.e. it is
only once settlement occurs that the requirement to return the
capital gain is triggered
if an assessment has already been made for the income year in
which the contract was entered, the taxpayer will need to have that
assessment amended once the contract settles, and
where an assessment is amended to include a net capital gain,
and a liability for interest arises, the discretion to remit the
interest (i.e. not impose the interest) will ordinarily be
exercised in full where the request for amendment is lodged with
the ATO within a reasonable time after the date of settlement (in
most cases, one month after settlement would be considered to be a
The Determination is particularly important in the context of
terms and instalment contracts that may not settle for many years.
Vendors are often not aware of the Determination and may have
returned capital gains and payed CGT earlier than they are required
Put and call options
Put and call options can be a useful planning tool when
disposing of real property towards the end of an income year. Entry
into a contract of sale on 1 June 2009 that settles on 1 August
2009 would trigger a CGT liability for the vendor in the 2008/09
income year. However, entry into a put and call option on 1 June
2009 exercisable on or after 1 July 2009 (with a sale contract that
comes into existence on exercise of the put and call option and
that settles on 1 August 2009) would not trigger the CGT liability
until the 2009/10 income year.
While the use of a put and call option will be effective to
defer the time of the CGT event, it will not generally be effective
to satisfy the 12-month holding period required to access the CGT
discount concession. For example, where the vendor (an individual)
in the above example acquired the real property on 30 June 2008,
the vendor would not be able to apply the 50% discount concession
because the put and call option was entered on 1 June 2009, i.e.
within 12 months.
How can the Determination or put and call options assist
The Determination is important for both vendors and purchasers
in facilitating existing and new transactions in the current
From a vendor's perspective, application of the
Determination may allow real property to be realised more easily or
at a higher price as a result of waiving (existing contracts) or
not requiring (new contracts) large up-front payments from the
purchaser to cover CGT liabilities.
From a purchaser's perspective, application of the
Determination may prevent the purchaser from defaulting on its
payment obligations under an existing contract (depending on its
terms) or may allow a new acquisition to proceed, i.e. the numbers
may stack up if the purchaser is not required to finance the
vendor's CGT liability.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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