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Edited version of your written advice
Authorisation Number: 1051236413670
Date of advice: 14 June 2016
Ruling
Subject: Capital gains tax – acquisition date – pre-CGT v. post-CGT
Question 1
Will any capital gain or loss you make on the disposal of the property be disregarded as a pre-capital gain asset?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2018
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You and your partner entered into a license to occupy town or suburban lands with an Australian state.
The license contained conditions that were required to be met before ownership of the land was transferred to you and your partner.
You did not satisfy these conditions in full delaying the transfer of the title to the land.
As a part of as family court order you became the sole owner of the property after separation from your partner.
The property is not your main residence.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 subsection 109-5
Reasons for decision
Capital gains tax (CGT) event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)), such as when an asset is transferred from entity to another by way of sale or gift.
If an asset is acquired as a result of CGT event A1 happening the asset is acquired at the time of the CGT event as per subsection 109-5(2) of the ITAA 1997.
In your case, you and your partner entered into an agreement to purchase a block of land over a period of time form an Australian state. The agreement also stated conditions that were required to be met before the title of the land would be transferred into your names. The agreement also specified that if these conditions were not met, the land shall be absolutely forfeited along with all purchase money and fees already paid.
It is important to clearly understand the nature and effect of particular conditions of a contract. There is a clear difference between a condition which is precedent to the formation or existence of a contract and a condition which is precedent to the obligation of a party to perform their part of the contract. In the former case, non-fulfilment of the condition prevents a binding contract from coming into existence. No contractual rights enforceable by the parties are created unless and until the condition is fulfilled. In the latter case, a binding contract exists which creates rights capable of enforcement, though the obligation of a party to the contract to perform their part of the contract depends on fulfilment of the condition. Non-fulfilment of the condition entitles one or both parties to terminate the contract.
The High Court of Australia considered the distinction between conditions precedent to the formation of a contract and conditions precedent to the performance of a contract in Meehan v Jones (1982) 149 CLR 571; 42 ALR 463. In that case, the High Court indicated that a contractual condition, such as obtaining approval for finance by the vendor, will not be a condition precedent to the formation of the contract but rather a condition precedent to the performance of the contract (or a condition subsequent), which in either case the contract is valid from the time the contract is made.
The High Court also made the distinction between:
● an agreement that provides one of the parties an unfettered discretion to conclude the contract (which will be a condition precedent to the formation of the contract), and
● an agreement that requires that if a particular condition is met the contract is concluded, which would be either a condition precedent to the performance of the contract or a condition subsequent.
In your case, the Australian state had the discretion to decide whether or not you had satisfied the conditions of the agreement, and these conditions are therefore conditions precedent to the formation of any contract. Therefore, as you acquired the title to the land after 20 September 1985 it is a post-CGT asset and any capital gain or loss you make on its disposal will not be disregarded under the exception in paragraph 104-10(5)(a) of the ITAA 1997.
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