CGT: Capital proceeds payable by instalments - non-receipt rule

Where the 'consideration in respect of the disposal of an asset' is payable by instalments over time, does former section 160ZF of the Income Tax Assessment Act 1936 (ITAA 1936) apply to later reduce that consideration if some of the monies are ultimately not received as a result of the vendor agreeing, several years after completion of the sale agreement, to a reduction in the amount owing?

No. Former section 160ZF of the ITAA 1936 does not apply to reduce the consideration in respect of the disposal of an asset if the vendor later agrees to a reduction in the amount owing.

In 1995 the taxpayer entered into a contract for the sale of an asset to an unrelated purchaser. The selling price under the contract was payable in ten equal annual payments with interest on the unpaid balance from time to time. The contract was completed on the day it was entered into, and at that time, the vendor was required to transfer to the purchaser the asset and any documentation that the vendor held in respect of the asset. The balance of the purchase price owing was subject to certain discounts if the purchaser elected to pay out the balance of its obligations under the contract earlier than the due date.

The purchaser made the required annual payments and there was no indication they would not continue to do so. In 2001, the vendor taxpayer sought out the purchaser and initiated negotiations for the payment of the outstanding balance. This resulted in the vendor agreeing that the purchaser would satisfy the remaining obligations under the contract by paying (in two equal payments) an amount that was less than the amount the vendor was entitled to, and also less than the amount that would have applied if the relevant discount had been taken up at that time by the purchaser.

As a result, the disposal consideration received by the taxpayer was less than the amount in the contract upon which the capital gain made from the disposal was calculated.

Former subsection 160ZF(1) of the ITAA 1936 applies, in certain circumstances, to reduce the consideration in respect of the disposal of an asset where the whole or a part of the consideration has not been, and is not likely to be, received. As a result, the capital gain arising from the disposal would accordingly be reduced.

The reduction does not apply if the non-receipt of the whole or a part of the consideration is due to an act or thing done, or omitted to be done, by the taxpayer or an associate of the taxpayer, or if the taxpayer has not taken all reasonable action to secure payment of the unpaid part of the consideration (former subsection 160ZF(2) of the ITAA 1936).

In the present instance, the reduction in the consideration was brought about by approaches made by the taxpayer to the purchaser several years after the completion of the sale agreement, after the time had passed for the purchaser to take advantage of a major discount and by the taxpayer agreeing to accept less than the full amount outstanding. Ultimately, the purchaser was allowed a large reduction in the outstanding balance.

Consequently, the non-receipt of part of the consideration is not covered by former subsection 160ZF(1) of the ITAA 1936 because the reduction in the consideration was caused by an act or thing done by the taxpayer.

Note: Former section 160ZF of the ITAA 1936 was rewritten as section 116-45 of the Income Tax Assessment Act 1997 (ITAA 1997). The decision set out in this ATO Interpretative Decision is therefore equally applicable to the operation of section 116-45 of the ITAA 1997.