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Ruling

Subject: Disposal of a CGT asset

Question 1

Are you considered to have disposed of the property on the date of the contract of sale?

Answer

Yes.

Question 2

Are you required to include the capital gain made from the disposal of the property in your assessable income for the 2010-11 financial year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You entered into a contract for the disposal of your property during the 2010-11 financial year.

The contract included a condition that required you to obtain a development approval in relation to the land prior to settlement. This required extensive preliminary works and approvals. Some of the works were conditional and unable to be completed in the 2010-11 financial year.

The requirements of the condition were met during the 2011-12 financial year.

Settlement occurred during the 2011-12 financial year.

Relevant legislative provisions

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

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

Reasons for decision

The timing of a CGT event is important because it determines in which financial year you report your capital gain.

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 happens on the disposal of a CGT asset. Subsection 104-10(3) of the ITAA 1997 sets the time of CGT event A1 as:

(a) when you enter into the contract for the disposal; or

(b) if there is no contract - when the change of ownership occurs.

If a contract is subject to a condition, it does not affect the time of the making of the contract unless it is a condition precedent to the formation of the contract (Taxation Determination TD 94/89). Contracts subject to a condition precedent to the formation of a contract are not binding until that condition is met. No contract would be in existence before the condition is fulfilled, therefore, the time of entering into the contract, for the purposes of CGT event A1, would be the time when the condition is fulfilled.

Taxation Determination TD 18 examined an 'off the plan' purchase where the acquisition of land or land and building could not be completed until certain events had happened. For example, where the owner of the land has not completed all capital works required before building can commence such as finalisation of boundaries, roads and telephone and electricity connections.

TD 18 held that an 'off the plan' contract is a contract subject to a condition precedent to the performance of the contract (rather than a condition precedent to the existence or formation of the contract).

In such cases, the purchaser enters into a contract, usually paying a deposit on signing the contract, with settlement and payment of the balance of the purchase price not occurring unless a specified event happens. This could be the finalisation of all capital works needed before building can commence or the completion of the building.

On this basis, an 'off the plan' contract is 'made' at the time it is executed. However, no liability for the balance of the purchase price arises until the condition, for example, the registration of title, is satisfied.

The differences between conditions precedent to the performance of a contract and conditions precedent to the existence of a contract were discussed in the case Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR at 511 where Mason J observed that:

There is an obvious difference between the condition which is precedent to the formation or existence of a contract and the condition which is precedent to the obligation of a party to perform his part of the contract and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment. In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled. In the second category there is a binding contract which creates rights capable of enforcement, though the obligation of the party, or perhaps of both parties, to perform depends on fulfilment of the condition and non-fulfilment entitles him to terminate.

And later at 552:

Generally speaking the court will tend to favour that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract which makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion. (emphasis added).

In Sandra Investments Pty Ltd v. Booth (1983) 153 CLR 153, the contract for the sale of land was expressed to be "subject to and conditional upon the approval of the Beaudesert Shire Council to a plan of subdivision... within six (6) calendar months". It was further provided that if such approval was not obtained the purchaser would be entitled to cancel the contract. It was held that the approval was expressed as a condition precedent to the obligation to complete the contract, not as a condition precedent to the formation of the contract.

Similarly, in your case you entered into a contract for the sale of your land during the 2010-11 financial year. The contract was subject to a condition. It took a considerable amount of time for the condition to be fulfilled and settlement did not occur until the 2011-12 financial year.

The fact that the fulfilment of the condition took some time did not prevent the formation of the contract. We consider it was a condition precedent to the performance of the contract, not a condition precedent to the existence of the contract. The non-fulfilment of the condition would merely have allowed you or the purchaser to terminate the contract. Additionally, there is no provision in the legislation that would allow the Commissioner the discretion to treat the date of settlement as the disposal date as opposed to the date the contract was entered into.

Accordingly, the CGT event occurred on the date that you entered into the contract. Therefore, the capital gain made on the disposal of the property is to be included in your income tax return for the income year in which you entered into the contract, being the 2010-11 financial year.

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