Edited version of your written advice

Authorisation Number: 1013119377922

Date of advice: 3 November 2016

Ruling

Subject: Capital gains tax - other - acquisition date

Question:

Is any capital gain or capital loss made on the disposal of the land component of the property (the property) disregarded

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts

You have provided the following documents, which should be read in conjunction with, and form part of this private ruling:

Company X (the Company) was incorporated prior to 20 September 1985.

The late (A) and the late (B) acquired all the shares in the Company prior to 20 September 1985.

'A' had been attempting to locate appropriate premises from which to operate their growing business.

'A' inspected the property and commenced negotiations with the vendor in relation to acquiring the property as planning permission was required from the local Council. This was undertaken prior to the incorporation of the Company.

A deposit was paid to the vendor prior to 20 September 1985.

A development application was lodged with the local Council prior to 20 September 1985 in relation to the change of use of the property as the consent of the Council was required.

A fee was negotiated with the vendor in relation to the delay in completing the sale of the contract while the Council considered the development application.

Alterations were required to the property to make them suitable for the intended use.

A contract to acquire the property was entered into sometime prior to settlement.

Capital works were undertaken on the property subsequent to settlement. These are separate assets to the land component of the property.

The property has been sold.

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

You may make a capital gain when a capital gains tax (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 and Anor v FC of T 2001 ATC 4146, 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 this case, the Company entered into a contract to purchase land prior to 20 September 1985.

The Company made an offer to purchase the property prior to 20 September 1985. Planning approval was required by the local Council in relation to the change in use of the property and this delayed settlement. Settlement occurred after 20 September 1985.

The offer to acquire the property by the Company and acceptance by the vendor of the deposit shows that there was mutual intention of all parties to enter into binding obligations and the documents provided support the existence of this intention to form legal relations and supports that a contract was formed on the date that the contract was exchanged with the purchaser. Therefore, it is viewed that the company acquired the land component of the property when the contract was entered into prior 20 September 1985

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