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Capital Gains Tax (CGT) and Instalment Contracts


Most tax practitioners will conclude that a vendor selling a property (that is not their main residence) will be liable for capital gains tax at the time that they enter into an Instalment Contract (a Terms Contract), as opposed to the capital gain being realised in each instalment received during the term of the Contract, or at the end, when the Contract is paid out.

In taking this view, they rely upon entry of the Contract being a CGT event B1.

The following is the law, followed by the ATO Interpretation, of CGT event B1

The Income Tax Assessment Act (the ITAA)

Subsection 104-15(1) of ITAA 1997 provides:

CGT event B1 happens if you enter into an agreement with another entity under which:

  1. the right to the use and enjoyment of a CGT asset you own passes to the other entity; and
  2. title in the asset will or may pass to the other entity at or before the end of the agreement.

The provision contemplates the existence of only one agreement for it to operate.

The ATO Interpretation of CGT event B1

Entering into a terms contract

CGT event B1 happens to real estate if you enter into an agreement where the new owner is entitled to possession of the land or the receipt of rents and profits before becoming entitled to a transfer or conveyance of the land.

Where this happens under a contract, it is known as a terms contract and the new owner usually completes the purchase by paying the balance of the purchase price and receiving the instrument of transfer and title deeds.
It may also happen where an agreement is made with a relative or other party to use and enjoy the property for a specified period after which title to the property passes to them. It will not happen where, under an arrangement, title to a property may pass at an unspecified time in the future.

CGT event B1 happens when use and enjoyment of the land is first obtained by the new owner. Use and enjoyment of the land from a practical point of view takes place at the time the new owner gets possession of the land or the date the new owner becomes entitled to the receipt of rents and profits.

If the agreement falls through before completion and title to the land does not pass to the acquirer, you may be entitled to amend your assessment for the year in which CGT event B1 happened.


This view applies to one-off transactions, but does not apply to vendors who are carrying on a business. For vendors carrying on a business, the ATO takes the view that the trading stock provisions of the ITAA apply, rather than the capital gains provisions. One consequence is that the capital component of the instalments of capital received is counted in the income of the vendor in the tax year of its receipt, rather than as a capital gain.

This is the ATO interpretation found in Interpretative Decision 2004/27

ATO Interpretative Decision 2004/27

Income Tax
Derivation of income: residential properties instalment sales contracts - carrying on a business

FOI status: may be released
Status of this decision: Decision Current


For a taxpayer carrying on a business, are payments received from the sale of residential properties under instalment sales contracts included in assessable income under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year in which the contract is entered into?


No. The payments will not be included in the assessable income of the taxpayer under subsection 6-5(1) of the ITAA 1997 in the income year in which the contract is entered into, as the income has not yet been derived.


The taxpayer carries on a business of buying and selling residential properties. The properties are sold under instalment sales contracts with vendor finance.

The instalment sales contract has the following features:

  • the sale price represents a profit over the investor's purchase price
  • the purchaser will pay the investor a deposit
  • vendor finance is provided to the purchaser with interest charged at a premium above the rate of interest paid by the investor on their mortgage on the property
  • payment of the balance of the price, plus interest, is by instalments over a substantial period such as 25 years
  • the deposit and instalments are not refundable
  • the purchaser is licensed to occupy and entitled to possession of the property during the term of the instalment contract
  • the contract states that this occupation or possession is not by way of lease
  • the purchaser is required to reimburse the investor for the rates and taxes on the property
  • the purchaser is required to keep the property in good condition and repair
  • the investor retains title to the property until the final instalment is paid and the contract is completed
  • if the purchaser defaults on the contract the deposit and instalments paid are forfeited to the investor

It is common ground that the interest is included in assessable income in the year it is received.
The taxpayer did not use the properties for any other purpose prior to sale. The properties were sold for an amount that was in excess of the amount paid by the taxpayer to acquire the property. Each property was sold within six months of it being acquired by the taxpayer.

The properties are trading stock for the purposes of subdivision 70-C of the ITAA 1997.
For detailed reasons, go to the ID - JA&style=html&sdocid=AID/AID200427/00001&recStart=1&PiT=99991231235958&recnum=22&

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