Edited version of private ruling

Authorisation Number: 1011476691725

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Ruling

Subject: Capital gains tax (CGT) - acquisition of CGT asset - date of contract - disposal of CGT asset

Will you be able to disregard the capital gain made on the disposal of the dwelling?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse jointly purchased a dwelling located with another couple. Each couple acquired a 50% ownership interest in the dwelling.

You and your spouse made a verbal offer to purchase the other couple's 50% ownership interest in the dwelling for a specified amount before 20 September 1985.

The offer was accepted before 20 September 1985 on the understanding that the other couple would assist in the transferring of the title into you and your spouse's names.

You and your spouse paid the other couple the agreed amount before 20 September 1985.

The other couple's interest in the dwelling was transferred into you and your spouse's names after 20 September 1985.

You and your spouse disposed of the dwelling after 20 September 1985 and have made a capital gain.

You have provided a number of documents which should be read in conjunction with, and form part of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Subsection 109-5(2)

Reasons for decision

Capital gains tax

You may make a capital gain when a CGT event happens to a CGT asset. The most common CGT event is CGT A1 which happens when you dispose of your ownership interest in a CGT asset to another entity.

When a CGT asset is disposed of as a result of CGT event A1, the time of the event is when a contract for the disposal of the CGT asset occurs, or if there is no contract, when a change of ownership occurs.

A person acquiring a CGT asset as a result of a CGT event A1 is taken to have acquired the CGT asset when the disposal contract is entered into, or if none, when the entity disposing of the CGT asset stops being the asset's owner.

Generally, CGT assets acquired before 20 September 1985 are exempt from CGT, and any capital gain made on the disposal of pre-CGT assets can be disregarded.

Date of contract

A contract is required only to have the attributes prescribed by common law for the formation of a contract. Briefly, a binding contract is generally entered into where one party communicates unconditional acceptance of an offer made by the other party. In some cases difficulty may arise in determining at what point of time a binding contract is made. This could be particularly so in the case of a contract that is wholly or partly oral.

Thus, a contract may be an oral contract and the date for such a contract would be the date ascribed to it at common law. This would mean that the contract in question might be unenforceable, or even illegal, at the time of its making. But if it was carried into effect with the consequent disposition of an asset, then the relevant time of the making of the contract was when the unenforceable contract was made.

If the asset is disposed of under a contract, the time of CGT event A1 is when the taxpayer enters into the contract. For this purpose, a contract may be an oral contract, provided it has the attributes required by common law, eg an intention by both parties to be bound by it. A number of cases have considered the date when a contract was formed. In Gardiner v FC of T 2000 ATC 2018, the AAT held that a property was acquired when a taxpayer's offer was accepted by the vendor, not when the contracts were formally exchanged two months later. In McDonald & Anor v. Federal Commissioner of Taxation (2001) 109 FCR 207; 2001 ATC 4146; (2001) 46 ATR 426, the Full Federal Court confirmed that capital gains derived from the sale of a property were subject to CGT where the oral contract was made pre-CGT but the written contract was exchanged post-CGT. The court was swayed by the convention in the law on the sale of land in NSW that no binding contracts existed until the exchange of contracts. This convention could be overridden by the parties with mutual intention, but clear evidence of this intention had to be produced. In this case, the evidence showed that the first time that the parties had reached a consensus with the intention to form legal relations occurred on exchange and the parties could not rewrite history by backdating the contract.

Application to your case

In your case, you and your spouse jointly purchased a dwelling with another couple, with each couple acquiring a 50% interest in the dwelling. You and your spouse verbally made an offer to purchase the other couple's 50% ownership interest in the dwelling before 20 September 1985 for a specified amount. An agreement was reached under which you and your wife would pay the other couple the specified amount and the other couple would assist in transferring their ownership interest in the dwelling to you and your spouse. The agreement was not evidenced in writing. You and your spouse paid the agreed amount to the other couple before 20 September 1985. The other couple's interest in the dwelling was not transferred into you and your spouse's names until after 20 September 1985.

You and your spouse, and the other couple, had verbally agreed on the terms for the purchase of their share in the dwelling. The fact that you and your spouse paid the agreed amount to the other couple, and that the other couple have transferred their interest in the dwelling to you and your spouse shows that there was mutual intention of all parties to enter into binding obligations, and that all parties have complied with their contractual obligations. Therefore, while the agreement was not evidenced in a written contract, it is viewed that your actions, and those of the other couple, support the existence of the intention to form legal relations, and that a contract was formed on the date that the agreement with the other couple had been reached. Therefore, it is viewed that you and your spouse acquired the second 50% ownership interest in the dwelling from the other couple when the oral contract was entered into before 20 September 1985.

You and your spouse disposed of the dwelling and have made a capital gain. As you and your spouse acquired both your original 50% interest in the dwelling and the second 50% interest in the dwelling before 20 September 1985, it is viewed that the dwelling was a pre-CGT asset. Therefore, any capital gain made on the disposal of the dwelling can be disregarded.

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