Edited version of your written advice

Authorisation Number: 1012732854398

Ruling

Subject: CGT - Asset Acquisition - Events A1 and B1

Question 1

Is the time of event for the acquisition of land under subsection 109-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) prior to the introduction of the Capital Gains Tax (CGT) regime?

Answer

No

Question 2

Will having access on the property for use and enjoyment and preliminary or minor works prior to settlement trigger CGT event B1 under section 104-10 of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The director of the trustee company for Trust 1 and Trust 2 (the taxpayers) began discussions to purchase several adjoining Lots of land in a project development prior to the introduction of the capital gains tax regime.

A letter from the project manager dated late 1984 referred to the reserve the blocks of their choice at their earliest convenience.

The taxpayers state that as per the advice on the letter, the adjoining Lots were secured "reserved" from the developers by the director of the trustee company early 1985. However, no documentation was provided that the project manager accepted the reservation of the Lots.

Two Lots were in Stage 1 of the development and the Lot in question was part of Stage 2.

Stage 2 development had an undated proposed price list until the final list issued in mid-1987.

The taxpayer is unsure whether the agreements to purchase were verbal or in writing as they cannot locate any correspondence or the contracts of purchase for all the three Lots.

The taxpayers state that based on their accounting records (no evidentiary documents provided), settlement of two Lots occurred between early and mid-1985.

There is no mention if a deposit was paid for the Lot in question to secure its purchase.

The taxpayers advise that due to significant delays stemming from the developer formally having to have the titles created for the entire second stage, the title for the lot in question did not register until April 1987.

We are advised that the settlement date for the Lot in question did not occur until mid-1987.

Late in 1984, the director approached an architect to plan the family residence incorporating all three Lots. The architect and his staff had full access to all three Lots for the purposes of measuring, soil testing, and commencing concept work.

Architect plans for the residence were drafted and presented around April 1985. Construction of the residence commenced in January 1986. A letter from the architect dated this year, confirms that in late 1984 he was engaged by the director to prepare a design for a family complex on the three Lots and provided a copy of the plan.

From June 1985, until they became the owners of the respective lots, the taxpayer states that they were allowed the use and enjoyment of all blocks for certain purposes within the lot's canal boundaries, access to vehicles and access by the architect.

The taxpayers state that around May 1985, the first physical improvements to the three Lots were in the form of these activities along the entire canal frontage of all three Lots and planted vegetation to bind and secure the rock walls of the canal frontage of the relevant lots. These were done in an effort to restore the environment around the canal wall.

We requested information from the taxpayers on two occasions for a copy of the Land Title Deed for affected Lot as evidence that the transfer of land was effected. The taxpayers did not provide the Land Title Deed.

A request was also made on the treatment of transfer of land in the respective state. The taxpayers stated that in their state the legislation states that no interest in land can be created or disposed of except by writing.

The taxpayers accepts that the property law in their state requires a written contract for interest in land to be created or disposed of, but contends that under normal CGT rules the acquisition date for CGT purposes is the date of the contract and that under McDonald v FCT (2001) 46 ATR 426 a verbal unenforceable contract can be the relevant acquisition event.

The taxpayers' private ruling application cited the case McDonald v FCT (2001) 46 ATR 426 (the McDonald case) where the fact that a verbal agreement for a sale of land is:

(a) unenforceable does not disqualify the verbal contract from being the authority for the acquisition date for the purposes of CGT, provided that the parties intended to be bound by the terms of that agreement; and

(b) that the acquisition date is the time that taxpayer first obtains use and enjoyment of the asset.

The taxpayer stated that they had full use and enjoyment of all three Lots, we requested for evidence of such use and enjoyment that indicated an agreement for a certain period of time and when the agreement ends the title passes.

The taxpayers' reply is that as the agreement was a verbal agreement, as such the only evidence they have is the facts pertaining to the use of the Lots as outlined in the private ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 section 104-10

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

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

Reasons for decision

The general rule for the acquisition of a CGT asset is contained in subsection 109-5(1) of the ITAA 1997, which provides that an entity acquires a CGT asset when it becomes its owner and the commencement of that ownership is the acquisition time for CGT purposes.

CGT events are the different types of transactions that may result in a capital gain or capital loss. Subsection 102-25(1) of the ITAA 1997 explains that in those circumstances where more than one event may be applicable, the one you use is the one that is the most specific to your situation.

In determining whether affected Lot is acquired prior to 20 September 1985, we look to the most appropriate CGT event that will be most specific to the situation. In this case, CGT A1 and CGT B1 may be applicable to the acquisition of the Lot in question.

CGT event A1 - disposal of a CGT asset

Section 104-10 of the ITAA 1997 explains that a disposal or acquisition of a CGT asset takes place if a change of ownership occurs from a taxpayer to another entity, whether because of some act or event or by operation of law, such as when an asset is transferred from one person to another by way of sale or gift.

The time of CGT event A1 under subsection 104-10(3) of the ITAA 1997 is when the contract for disposal or acquisition is entered into. If there is no contract for disposal or acquisition of the asset, the CGT event A1 happens when the change of ownership occurs, which is generally when settlement occurs.

CGT event B1 - use and enjoyment before title passes

Section 104-15 of the ITAA 1997 discusses CGT event B1, which occurs if a taxpayer enters into an agreement under which the right to the use and enjoyment of a CGT asset passes to another entity, and title of the asset will, or may, pass to the other entity at, or before the end of, the agreement.

The person who eventually acquires the asset when title passes is taken to have acquired it when they first obtained the use and enjoyment of it (subsection 109-5(2) of the ITAA 1997)

The Commissioner considers that CGT event B1 may happen when the agreement for the use and enjoyment of an asset is for a specified period, after which the title of the property passes to the other entity. CGT B1 would not occur when the title of an asset may pass to the other entity at an unspecified time in the future.

The time of the CGT event B1 is when the other entity first obtains the use and enjoyment of the asset.

Application of the law to your facts

As the taxpayer cannot provide a copy of the contract of sale or provide a date of when a contract would have been made, the taxpayer has cited the case McDonald v FCT (2001) 46 ATR 426 (the McDonald case) where the fact that a verbal agreement for a sale of land is:

a. unenforceable does not disqualify the verbal contract from being the authority for the acquisition date for the purposes of CGT, provided that the parties intended to be bound by the terms of that agreement; and

b. that the acquisition date is the time that taxpayer first obtains use and enjoyment of the asset.

CGT event A1

The first matter to be determined in this instance is what a "contract" is.

In the case of Gardiner and Federal Commissioner of Taxation [2000] AATA 257; (2000) 44 ATR 1065; 2000 ATC 2018 (the Gardiner case) at page 262; 1070; 2023 Senior Member Pascoe said:

9. In the case of McDonald v FC of T 98 ATC 4306, the Federal Court considered an appeal from a decision of this tribunal (AAT 10911, 6 May 1996) in which a similar question arose. There, the applicants asserted that they entered into an oral agreement to purchase a property some days before 13 September 1985 that came "into effect" on that date. The respondent asserted that there was no contract until the formal signing and exchange of contracts on 31 October 1985 notwithstanding that such contracts were dated 13 September 1985. The tribunal, at first instance, considered that "contract" in the context of s 160U(3) should be read to mean "an enforceable contract". It then found that it was not until exchange was effected on 31 October 1985 that there was sufficient consensus for it to be said that there was an enforceable contract. The applicants appealed to the Federal Court and challenged the tribunal's view that a contract for the purposes of s 160U(3) must be "legally binding and enforceable". Finn J, in allowing the appeal, said at ATR 565; ATC 4308:

For my own part, against the premise of the subsection, I can see no reason for requiring that the contract have any attributes other than those prescribed by the common law for the formation of a contract. Nor can I see any reason for ascribing a date to the making of such a contract other than the date that would be ascribed to it at common law.

The immediate consequence of this view is that the contract in question may be unenforceable - or even illegal: see Singh v Ali [1960] AC 167 - at the time of its making. But if it is carried into effect with a consequential disposition of an asset, then s 160U(3) applies to the unenforceable contract so made. I merely note that if such a contract is not carried into effect then, the premise of s 160U(3) not having been satisfied, no question of its application can arise.

The Senior Member then went on after considering the classes of contract referred to by the High Court in Masters and Another v. Cameron (1954) 91 CLR 353 and the comments of Walsh J. in Godecke v. Kirwan (1973) 129 CLR 629 and said at page 263; 1071; 2024 that:

12. In this case the letter of offer of 23 July 1985 appeared to contain the essential matters to establish a contract. It set out the details of the property to be purchased, the consideration, the amounts to be paid, the timing of the payments and the date of possession.

In the present ruling application, it would appear that the taxpayer and the developer agreed to the details of the land to be purchased, the consideration applicable to the land and the amounts to be paid in relation to the purchase of the three Lots. As the Lot in question was not created or registered at that time, the actual timing of purchase and the date of actual possession of the land is in question.

The taxpayers state that to ensure the purchase, the three lots were to be reserved as per the letter suggested from the project manager. The taxpayers state that the three Lots were reserved by the director in January 1985. However, the taxpayers have not provided any documentation to support their statement or that the project manager confirmed or accepted the reservation of the three Lots. Further the taxpayers are unsure in the first instance whether such "agreements" to purchase were verbal or in writing

In the state in question, legislation headed "Instruments required to be in writing" provides that no interest in land can be created or disposed of except by writing in order to be enforceable. This means that an oral contract is not enforceable. The legislation also states that no assurances of land shall be valid to pass an interest at law unless made by deed or in writing signed by the person making such assurance.

Therefore, as per the requirements of the state legislation, in reserving the three Lots, there should be a deed or letter confirming the reservation of the three Lots and a contract of sale must be in place to effect the legal transfer of land. The taxpayers are not able to provide any documentary evidence in relation to purchase of the three Lots. The taxpayer is unsure of whether the agreements to purchase were verbal or in writing as they cannot locate any correspondence or the contracts of purchase for all the three Lots. The taxpayers also did not provide a copy of the title deed to indicate that a transfer of ownership had occurred. This evidence was requested from the taxpayers on two separate occasions, with none forthcoming.

It is understood from the information provided that in the discussions between the developer and the director of the trustee company that there was an indication to purchase the Lot in question. However, an expected date of purchase of the property was significantly delayed due to the significant delays in creating the title of the land. The taxpayer states that a proposed price list was provided around March 1985 and they have agreed on that price, however, the purchase of the land could not be finalised until the land was registered. The land was registered on April 1987 and the purchase of the Lot in question was settled in June 1987.

The taxpayer stated that during the purchase of the first two Lots that an implied condition on the developers to be bound to them to transfer the Lot in question when able to do so. However, as it is stated in the state legislation, assurance of interest in land must be in writing or by deed for the interest to be valid. The taxpayers have not provided any evidence to support this fact.

As the land was not yet created and registered at the time of purchase of the first two Lots, we could regard the interest in the land as an "off the plan" purchase of land. The usual practice with "off the plan" purchases is that a deposit would be required on signing of the contract (CGT Determination Number 18). However, there was no mention of a deposit being made to ensure that the Lot in question has been secured for purchase or documentary evidence that an agreement was made binding the developer to comply with the implied condition.

Further, the state legislation requires a contract of sale for an effective transfer of land. In this instance, the taxpayers aver that they are unsure whether the agreement for all the Lots was verbal or written.

Therefore, in the absence of conclusive documentation and the taxpayers not presenting any credible evidence that clearly states that there was a verbal agreement, this appears to indicate that a tentative agreement had been reached between the developer and the director of the trustee company in relation to the purchase of the Lot in question. Because there was no actual timing as to when the purchase and possession of the land would take place, it must be said that the verbal agreement lacks certainty. Therefore the verbal agreement cannot be said to be a valid contract.

Because the verbal agreement is not a valid contract, then the timing for the CGT event A1 will therefore be the settlement date for the purchase of the Lot in question which occurred in June 1987.

The taxpayers have submitted CGT event B1 in the alternative.

CGT event B1

In order for CGT event B1 to happen, the relevant agreement must be one under which title will or may pass at the end of a specific period or on the occurrence of a specific event. CGT event B1 will not happen if, under a loose arrangement, title to an asset may pass at an unspecified time in the future.

In this case, the taxpayers have stated that they do not have a contract of sale and are unsure if there is an oral or written agreement as they could not locate any correspondence in relation to the purchase of the land. On two separate occasions, a request was made for a copy of the Title Deed for the Lot in question as evidence of the change of ownership. However, none were forthcoming.

For CGT event B1 to apply, an agreement must be in place between the taxpayer and the developer specifying their entitlement and period of time for use and enjoyment of the land and when the title passes. Due to significant delays in creating and registering the title for the Lot in question by the developer, there was uncertainty as to when the purchase and passing of the title will take effect.

The absence of the Title Deed indicates that a change of ownership has not taken place and the title has not passed. The taxpayers have also not sufficiently proven that there is valid agreement between the developer and the director of the trustee company to purchase the Lot in question.

Therefore, CGT event B1 will not happen in this case because the agreement that the use and enjoyment of the land was obtained from is not valid and the title has not passed.

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