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Edited version of your written advice
Authorisation Number: 1012786243221
Ruling
Subject: CGT - event A1 - disposal - contract date v settlement date - conditional contract
Question 1
Is the time of the disposal of the property for capital gains tax (CGT) purposes the date the contract for sale was settled?
Answer
No.
Question 2
Is the time of the disposal of the property for capital gains tax (CGT) purposes the date the contract for sale was entered into?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on
1 July 2013
Relevant facts and circumstances
You entered into a contract to dispose of a property in the year ended 2014.
The contract for sale was subject to certain conditions.
Settlement date under the contract was set as 21 days from the date of the conditions being met.
The purchasers waived the condition and settlement occurred in the year ended 30 June 2015.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
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)
Reasons for decision
CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).
You dispose of a CGT asset if a change of ownership occurs from you to another entity (subsection 104-10(2) of the ITAA 1997). The time of the event is when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).
The time when a contract is entered into is the time when it comes into existence for general law purposes. The timing may also depend on the terms and conditions of the contract and any relevant legislation.
If a contract is subject to a condition, an issue arises as to whether the condition is a condition precedent to the formation of the contract or whether it is a condition precedent to performance of the contract. In the first case, the contract does not come into existence until the condition is met. In the second case, the condition does not prevent the creation of the contract - non-fulfilment of the condition merely entitles a party to terminate the contract (see Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537) (Perri).
The nature of a condition (that is whether it is a condition precedent to the formation of a contract) depends on the proper construction of the terms of the contract. However, as pointed out by Mason J in Perri, generally speaking a court will tend to favour a construction which leads to the conclusion that a particular stipulation is a condition precedent to performance (as against a construction which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract).
There have been a number of cases which have involved a contract expressed to be subject to the obtaining of the consent of some person or body. In Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 a contract for the sale of land was expressed to be 'subject to and conditional upon approval of the Beaudesert Shire Council to a plan of division within six (6) calendar months' and 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 condition was precedent to the obligation to complete the contract, not as a condition precedent to the formation of the contract.
In your case, the relevant condition was not a condition precedent to the formation of the contract for sale. It was a condition precedent to performance of the contract where if not fulfilled, either party could have rescinded the agreement and terminated the contract. The other conditions in the agreement are also considered to be conditions subsequent to the formation of the contract and do not affect the time of making of the contract.
As such, the time of the disposal is when you entered into the contract for sale.
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