Capital Gains Tax: amendment of assessments to give effect to the timing rule

Does subsection 170(10AA) of the Income Tax Assessment Act 1936 (ITAA 1936) allow the Commissioner to amend an assessment for an income year to include, in that income year's net capital gain, the amount of a capital gain taken to have been made in that year because of the timing rule in paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), where the period of review would otherwise have expired?

Yes. Subsection 170(10AA) of the ITAA 1936 provides that nothing in section 170 of the ITAA 1936 prevents the amendment of an assessment for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997.

A company that is not a simplified tax system (STS) taxpayer enters into an unconditional contract to dispose of a capital gains tax (CGT) asset in the 2004-05 income year. The contract settles in a later income year.

The company disregards the capital gain in respect of this CGT event in its income tax return for the 2004-05 income year.

The Commissioner commences an enquiry into the affairs of the company, in relation to the 2004-05 income year, within four years of the notice of assessment being given to the company. However, the Commissioner does not determine that the capital gain should be included in the assessment for that income year until after the expiry of the four year period.

The amended assessment giving effect to the Commissioner's view therefore does not issue to the company until after this four year period. However, it is less than four years since the assessment issued for the income year in which the change of ownership occurred.

Section 170 of the ITAA 1936 provides statutory time limits for the amendment of assessments by the Commissioner. For a company that is not an STS taxpayer, the general rule is that where there has not been any fraud or evasion the Commissioner may amend an income tax assessment within four years after the date the notice of assessment was given to the taxpayer (item 4 of the table in subsection 170(1) of the ITAA 1936).

However, subsection 170(10AA) of the ITAA 1936 provides that nothing in section 170 of the ITAA 1936 shall prevent the amendment, at any time, of an assessment for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997 (item 30 of the table in subsection 170(10AA) of the ITAA 1936).

Section 104-10 of the ITAA 1997 states that a CGT event A1 happens if a taxpayer disposes of an asset. Paragraph 104-10(3)(a) of the ITAA 1997 provides that the time of CGT event A1 is when you enter into the contract for the disposal of the CGT asset. The effect of this paragraph may be to bring forward the time when a gain is assessable from the year of disposal to an earlier income year, that is the year in which the contract for the disposal was entered into. Taxation Determination TD 94/89 states that a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs.

The words 'for the purpose of giving effect to' in subsection 170(10AA) of the ITAA 1936 mean that the Commissioner does not have an unrestricted time limit for issuing an amended assessment in respect of a capital gain. The provision will only apply when the reason for the Commissioner being out of time is the operation of subsection 104-10(3) of the ITAA 1997, that is where there is a delay between the contract being entered into and the actual change of ownership. For example, in a situation where a taxpayer enters into a contract in year 1, and does not settle until year 5, the Commissioner can rely on subsection 170(10AA) of the ITAA 1936 to amend the assessment in respect of year 1, as the amended assessment is for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997.

In the present case, the Commissioner commenced an enquiry within the four years statutory time period for amending the relevant income tax assessment (2004-05 income year), but did not identify that the capital gain made from the disposal of the CGT asset should have been included in that income year until after that statutory time period had expired. Consequently, prima facie the Commissioner did not have the power to amend the income tax assessment.

However, in this case, the only reason that the Commissioner was amending that assessment was because of the rule in subsection 104-10(3) of the ITAA 1997, which results in the capital gain being assessable in the year in which the contract was entered into. The amended assessment was therefore made for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997. The amendment period for the income year in which the change of ownership occurred had not yet expired. Accordingly, subsection 170(10AA) of the ITAA 1936 allows the Commissioner to amend the 2004-05 income tax assessment in this respect.