CGT: Capital proceeds payable by instalments - total amount receivable included as capital proceeds

How is the 'consideration in respect of the disposal of an asset' determined under former section 160ZD of the Income Tax Assessment Act 1936 (ITAA 1936), if the sale proceeds are payable by instalments over a period of time?

The instalments are money or an entitlement to receive money, and therefore the total amount receivable is included in the consideration in respect of the disposal of the asset under former paragraph 160ZD(1)(a) of the ITAA 1936.

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 paragraph 160ZD(1)(a) of the ITAA 1936 included in the 'consideration in respect of the disposal of an asset', amounts of money entitled to be received by a vendor taxpayer. Former subsection 160K(3) of the ITAA 1936 stated relevantly, that a reference to a person being entitled to receive money includes a reference to a person being entitled to receive money either immediately, or at a future date, and either in a lump sum or by instalments. Former paragraph 160ZD(1)(b) of the ITAA 1936 included property other than money within its operation.

Accordingly, if the proceeds from the sale of an asset in 1995 are payable by instalments over time, the total amount receivable is included in the consideration in respect of the disposal of the asset under former paragraph 160ZD(1)(a) of the ITAA 1936.

Note 1: This ATO Interpretative Decision covers the situation where the proceeds from the sale of an asset are payable by instalments over time. It is not concerned with the sale of an asset for a lump sum plus a right to a contingent and unascertainable amount which is covered by Taxation Ruling TR 93/15.

Note 2: Former subsections 160K(3) and 160ZD(1) of the ITAA 1936 were rewritten as subsection 103-10(2) and section 116-20 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively. The decision set out in this ATO Interpretative Decision is therefore equally applicable to the operation of subsection 103-10(2) and section 116-20 of the ITAA 1997.