Edited version of private advice

Authorisation Number: 1051537922570

Date of advice: 10 July 2019

Ruling

Subject: CGT Event Date

Issue 1

Question 1

In relation to disposal of the asset by the taxpayer, what is the time of the CGT event?

Answer

On XX XXXX 20XX when the sale agreement was signed.

This ruling applies for the following period:

01 July 20XX to 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

The taxpayer entered into an agreement with an independent party (the purchaser) to dispose certain asset of the taxpayer.

The agreement is subject to the purchaser successfully achieving a future event.

No initial deposit was required from the purchaser for entering into the agreement with the taxpayer.

Completion date is defined in the agreement. Taxpayer and/or the purchaser can choose to terminate the agreement before completion.

At present, the taxpayer and the purchaser are negotiating a new completion date. Upon agreement of a new completion date, an amendment to the current agreement will be signed and executed accordingly.

Should the future event occur, the purchaser will notify the taxpayer and proceed to completion of the agreement.

The amount of purchase price, as stated in the agreement, can change and will be adjusted upon completion of the agreement.

Upon completion of the agreement, payment of the purchase price will be made to the taxpayer in different forms and/or components, depending on a number of factors.

Should the future event not occur, taxpayer and/or the purchaser may terminate the agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997

Unless otherwise stated, all legislative references under Issue 1 are to the Income Tax Assessment Act 1997 (ITAA 1997).

Reasons for decision

Pursuant to subsections 104-10(1) and 104-10(2), CGT event A1 happens if a taxpayer disposes of a CGT asset; the disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law.

The time of CGT event A1 is:

• when you enter into the contract for the disposal: paragraph 104-10(3)(a), or
• if there is no contract - when the change of ownership occurs: paragraph 104-10(3)(b).

In accordance with paragraph 104-10(3)(a), if there is a contract for the disposal of an asset, the time of the CGT event constituted by the disposal (CGT event A1) is when the contract was entered into.

Thus where a contract is involved, it is irrelevant when the change in ownership of the CGT asset actually occurs which constitutes the happening of CGT event A1.

Agreement and contract

The meaning of the expression 'contract for the disposal' in paragraph 104-10(3)(a) is discussed in ATO ID 2006/94 Income tax Capital gains tax: time of CGT event A1 where body corporate transfers property to developer (ATO ID 2006/94).

In the ATO ID 2006/94, it states that, the words "contract for the disposal" of a CGT asset refer to the contract that is the source of the obligation to make a specific disposal.

In Masters v Cameron (1954) 91 CLR 353 (Masters case), the court provided guidance on whether a contract has come into existence where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract. In such a scenario, the case may belong to any of three classes:

(1)  It may be a case in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect, or

(2)  It may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.

(3)  It may be a case in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

It was held in the Masters case that, in each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document.

In the current case, the taxpayer and the purchaser have agreed the terms and obligations in relation to sale/purchase of the taxpayer's asset by entering into the Agreement. Upon signing the Agreement, both parties are immediately bound to the performance of the agreed terms. Accordingly, the Agreement is considered as a binding contract for disposal of the taxpayer's asset.

Contract subject to condition

In Wickman Machine Tools Sales Ltd v L Schuler AG (1972) 2 All ER 1173, Stephenson LJ stated that:

"in a sense all conditions are precedent, some to an agreement beginning, others to it continuing".

In Maynard v Goode & Anor (1926) 37 CLR 529, Isaacs J identified three kinds of condition precedent, one of which is that, a condition which might be regarded as a condition precedent but which is a condition subsequent in relation, not to a particular term, but to the whole contract, as a binding obligation, the failure of which would entitle the person who stipulated it to retire from the transaction. ...... There is a binding contract from the outset which creates rights capable of enforcement, though the obligation of a party, or perhaps of both parties, to perform depends on fulfilment of the condition and a non-fulfilment entitles the party, or both parties, as the case may be, to terminate. In such a case the time when the contract was entered into, for the purposes of CGT event A1, would be the time when the agreement containing the condition was entered into.

In the case 24/94, 94 ATC 239, the contract was conditional on the purchaser obtaining approval for finance within a specified time was considered as it was made when the contract was signed, as the condition in relation to finance was a condition subsequent, not a condition precedent to the formation or existence of the contract.

Similarly, in the current case, the Agreement on XX XXXX 20XX is subject to the purchaser achieving a future event.

The conditional nature of the Agreement, the fact that the amount of the purchase price can be changed, and the fact that the completion date is being renegotiated would not prevent the taxpayer's asset from being acquired by the purchaser under a contract that was entered into on XX XXXX 20XX.

Accordingly, the contract was made when the Agreement was signed and entered into, the condition in relation to the taxpayer achieving a future event was a condition subsequent to the formation of the contract.

Subsequent variation(s) and/or amendment(s)

In FC of T v Sara Lee Household & Body Care (Australia) Pty Ltd 2000 ATC 4378; [2000] HCA 35 (the Kiwi Brands case), a company was held to have disposed of the assets of its business when the original agreement of sale and purchase was made, not at the time of a later amending agreement.

In the Kiwi Brands case, the change in the consideration was regarded as crucial by the taxpayer who argued that this resulted in the parties entering into a new agreement in August.

In deciding the time of the disposal of the assets, subsection 160U(3) of the Income Tax Assessment Act 1936 (ITAA 1936) was applied, which states that, where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.

The Court examined the effect of both agreements and, in particular, whether the amending agreement brought to an end the earlier agreement or allowed the earlier agreement to stand. The court stated that:

"Where there were two or more contracts which affected the rights and obligations of the parties to a disposal of assets, the identification of the contract under which the assets were disposed of, for the purpose of applying sec 160U of the Act, required a judgment as to which of the contracts was properly to be seen as the source of the obligation to effect the disposal. In this case, that contract was the purchase and sale agreement of 31 May 1991.

The words "under a contract", in sec 160U(3) directed attention to the source of the obligation which was performed by the transfer of assets which constituted the relevant disposal. From 31 May 1991, until completion on 30 August 1991, there was a contractual obligation on the taxpayer to dispose of its assets to Roche, or to an entity of the kind referred to in s 12.3 of the purchase and sale agreement. The content of that obligation did not change. The price was varied, as were certain other terms and conditions of the sale, but the agreement of 31 May 1991 was the source of the obligation which the taxpayer discharged by performance on 30 August 1991.

Both the deed of assignment and the deed of assumption of liabilities and contracts of 30 August 1991 were expressed to be pursuant to the agreement of 31 May, as amended.

If, in some case, it were impossible to relate a change of ownership to a contract in such a way as to produce a single time of disposal, then it may be necessary to apply sec 160U(4). That was not the case here."

In Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 (the Tallerman case), the judge pointed out that it depends on the intention of the parties as evidenced in the new agreement.

In Annalong Pty Ltd v FC of T 72 ATC 4141, it was held that, the second contract was a new and independent contract which evinced an intention to impliedly rescind the first contract, and it was the taxpayer's purpose of acquisition at the time of the second contract that was relevant. For CGT purpose, the land was disposed of and acquired under the second contract and the date of the disposal and acquisition was the date of the making of that second contract.

In the current case, as the condition to the contract has not been achieved by the purchaser, sale of the asset has not been completed yet.

Once the parties to the Agreement reach agreement on a new completion date, an amendment to the Agreement will be agreed and signed. Future adjustment(s) to the final amount of purchase price may also occur.

However, the contractual obligation remains on the two parties to purchase and/or dispose the taxpayer's asset; the Agreement on XX XXXX 20XX is the source of the obligation.

Provided that any subsequent amendment(s) and/or amending agreement(s) to the original Agreement on XX XXXX 20XX are pursuant to it, and on the basis that both the taxpayer and the purchaser have no intention or purpose to impliedly rescind the original Agreement at the time of any subsequent amendment(s) and/or amending agreement(s), time of the CGT event A1, sale of the taxpayer's asset, is considered to be when the contract was made, that is, on XX XXXX 20XX.

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