How a simple slip-up could see your property sale taxed twice

It is almost common knowledge these days that a capital gain is taxed in the financial year that the contract is signed, not the year of settlement, and getting this wrong can result in double taxation of the same capital gain.

Edward Sunna’s case, ruled on by the Federal Court at the end of last year, highlights the danger of declaring the capital gain in the wrong year as you could end up being taxed in both years.

This is because the ATO has an unlimited time period to amend old tax returns to include a capital gain, but if the amendment period (usually 2 years) has passed, they cannot remove the capital gain from the incorrect year.

In some scenarios, it is not so common knowledge as to which year applies. In Sunna’s case, he signed the contract on June 28, 2019, but did not receive the deposit – which was nearly 50 per cent of the sale price – until after June 30, now in the 2019-2020 financial year.

He then included the deposit in his 2020 tax return and when the sale of the $5.5 million Sydney unit went through in August 2022, he included the rest of the gain in his 2023 tax return.

In reality, the whole of the gain should have been included in the 2019 tax return. So if you’re planning on buying or selling a house soon, here’s what you need to know:

Sale of Asset: The capital gain goes in the tax return for the year that the contract was signed, regardless of when the deposit was received. If no contract was signed, then the year that the ownership of the asset transferred.

As you can see, this can result in the deadline for lodging tax returns expiring before the outcome is known. You can lodge your tax return without the capital gai,n while the outcome remains uncertain, then amend within a month of settlement.

The ATO undertakes not to charge interest or penalties providing the amendment is made within a reasonable time, generally a month.

Options: If you enter into an option to sell your property and the option is exercised, the option proceeds are just included with the sale proceeds in the financial year that the option is exercised – i.e., the year that the contract for an actual sale is signed.

If the option is not exercised, then you need to include the option proceeds in the tax return for the year, back at the start, when the option was entered into.

Forfeited Deposit: This goes into the tax return for the year that the deposit was forfeited. Note if the deposit is not forfeited, it just becomes part of the sale proceeds, so it applies to the tax return when the contract was signed.

Section 107 of the Income Tax Assessment Act prevents the two-year amendment period limitation applying when an amendment is made to include a capital gain that has not been previously been included in the tax return for that year.

The catch is that there is no similar provision to extend the amendment period to correct a capital gain incorrectly included in another year. So, the ATO can go back as far as it likes to include your capital gain in the correct year without having to remove it from the tax return for the year in which it was mistakenly included.

This will result in the capital gain being taxed twice. Sunna’s case found that there was no real impediment to this happening.

If this article has raised any concerns, you can apply to the ATO to exercise their discretion to allow the amendment period to be extended on the tax return where the capital gain was incorrectly included.

Julia Hartman founded BAN TACS Accountants more than 30 years ago and is still passionate about all things tax.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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