Edited version of private advice

Authorisation Number: 1051710452477

Date of advice: 3 July 2020

Ruling

Subject: Timing of CGT event A1

Question

1)     Did a CGT event happen when you entered into the contract to sell your Client Register to Company B?

2)     If so, what is the time of the CGT event?

Answer

1)     Yes. A number of CGT events occurred when you entered into the contract with Company B however CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) is considered to be the most specific CGT event.

2)     Under subsection 104-25(2) of the ITAA 1997, CGT event C2 happens in the 201F-1G year of income (the income year you entered into the contract).

This ruling applies for the following period: 201F-1G year of income

The scheme commences on: 1 July 201F

Relevant facts and circumstances

You commenced a business as an Authorised Representative of a Company (Company A) in 200A.

Your Representative Services Agreement (RSA) with Company A was amended in 200B. The amended RSA offered 2 options to terminate the RSA. The 2 options were:

1. you 'sell your Client Register' option to Company A; or

2. when you move to a new Company outside of Company A's Group.

The 'sell your Client register' option can be accessed when you:

·        intend to retire from the financial services industry;

·        become Totally Permanently Disabled; or

·        die,

and are not survived by a Practice Principal.

The 'sell your Client Register' option is governed by a Practices document.

Your amended 200B RSA and other agreements were novated in the 201C-201D year of income. Under the Novated Agreement, Company B, the Incoming Party, assumed all of Company A's obligations, the Retiring Party. Accordingly, after the Novation Date, you retained the 2 options to terminate the RSA with Company B.

As your Practice Principal intended to retire from the industry, you were eligible to and elected to sell your Clients Register to Company B.

Under the 'sell Client Register' option, you were required to:

·        give 6 months written notice to the Head of Company B in your state (notice); and

·        sign a Deed of Undertaking (undertaking).

Your notice was given in the 201F-1G year of income. The Commencement date of the undertaking was in the 201F-1G year of income and the Calculation date of the undertaking was 6 months later in the 201G-2H year of income. The undertaking document binds you and the Practice Principal. The undertaking can be amended with an Amended Terms Letter.

The undertaking also requires that you do not engage in any capacity in any activity within the Activity Restricted Area during the Restraint Period or work in the Industry during the Restraint Period within the Restricted Area.

You stated that there is no Amended Terms Letter. The General Manager (GM) of the relevant association of which you are a member is not aware of anything that can frustrate or invalidate the undertaking. The GM further stated:

·        The governing body have no interest in the undertaking as it is an issue for you; and

·        The governing body is unlikely to intervene in the undertaking whose terms were amended by recent legislative changes and are no longer conflicted.

The notice sets out the method of calculating the purchase price for the Client Register, the way the purchase price will be paid and the calculation of variations to the purchase price. The payment of the purchase price is as follows:

·        50% of the purchase price on Calculation Date

·        The balance less deductions for the value of products lost from the Client Register, 12 months after the Calculation Date (or the date of full settlement from the re-sale of the rights to your Client Register, if earlier)

Company B made a Payment Calculation offer in the 201G-2H year of income. which you accepted, after some negotiations on valuations and queries. From the date you gave notice in the 201F-1G year of income until the exit date, you continued to be a an Authorised Representative, ran your business as normal, continued to collect income that was due from your Client Register and maintained your registration in your industry. In the 201G-2H year of income, Company B advised you that your exit date was going to be 11 days after they advised you of the date. A week after Company B advised you of the date, you also advised your clients that you were leaving Company B and provided them with details of the exit date and their new Authorised Representatives.

Company B deposited the initial instalment of the Payment Calculation into your account in the 201G-2H year of income. The final instalment amount of the Payment Calculation will not be known until the 202H-2I year of income.

Your tax agent contends that:

·        CGT event A1 is the relevant event;

·        your transaction with Company B is like 'the example of shares being purchased through an option and the acquisition date of the shares as being the date the option is exercised'; and

·        your transaction with Company B should not have a disposal date in the 201F-1G but the date the option is exercised.

You have stated that the only issue to be addressed is the timing of the making of the contract.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-5(1) of the Income Tax Assessment Act 1997

Subsection 108-5(1) of the Income Tax Assessment Act 1997

Division 116 of the Income Tax Assessment Act 1997

Reasons for decision

Your Client Register is a legal or equitable right that is not property, so it is a CGT asset pursuant to section 108-5 of the Income Tax Assessment Act 1997 (ITAA1997). Two CGT events, A1 and C2 are applicable. The general rule of applying CGT events if more than one CGT event happens (with the exception of CGT events D2 and H2), is that the one that is most specific to the taxpayer's situation is the CGT event that applies. In your case, CGT event C2 is the most specific CGT event as it deals with the cancellation, surrender and similar endings of intangible assets.

Under CGT event C2 (subsection 104-25(2) of the ITAA 1997), the time of the event is:

(a) when you enter into the contract that results in the asset ending; or

(b) if there is no contract-when the asset ends.

Although Taxation Determination TD 94/89 Income tax: capital gains: in which year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land sale disposed of under a contract which is made in one year of income, but which is settled in a later year of income? does not specifically address CGT event C2, it provides some guidance on when a contract is entered into. Specifically, Note (1) of TD 94/89 states the following:

The time a contract is made is subject to the terms of the contract and any relevant legislation in each State. If a contract is subject to a condition, it does not affect the time of the making of a contract unless it is a condition precedent to the formation of the contract. Most conditions (e.g. standard 'subject to finance' clause) operate as conditions subsequent to the formation of the contract and do not affect the time of making the contract. See AAT Deputy President Dr P Gerber's discussion in Case 24/94 94 ATC 239 at 246-248; AAT Case 9451 (1994) 28 ATR 1108 at 1116-1118.

Your tax agent referred to this transaction being similar to a share being acquired through an exercisable option. Under the 'sell your Client Register' arrangement you did not acquire any shares in Company B or an interest in the incoming servicing provider. The acceptance of an agreed purchase price, the crediting of 50% of the purchase price directly into your bank account and the deferred payment of the balance of the purchase price after adjustments are not options for you to exercise as they are the fulfilment of the terms of the contract.

The word 'option' in the 'sell your Clients Register' option is used in the sense that you had two ways of terminating your RSA with Company B or its predecessor Company A rather than the other meaning which gives you the right but not the obligation to rescind the contract.

Under the 'sell your Clients Register' option (contract), the terms of the contract may be amended but the contract is binding once it has been signed. Although there were delays in implementing the terms of the contract, like delay in the payment of 50% of the purchase price, you continued to receive the income from the Client Register, maintained your registration in the industry and there was uncertainty on the payment of the balance of the purchase price but the execution of the contract cannot be frustrated.

In your case, there is no State legislation which will affect the timing of the making of the contract and, based on the information above and the information provided by the General Manager (GM) of the relevant Association, there are no conditions precedent attached to the contract that will affect the timing of the making of the contract.

You signed the undertaking, which is binding on you and Company B, to sell your Client Register in the 201F-1G year of income. The undertaking cannot be rescinded and although the terms of the contract could be amended, there was no Amended Terms letter. Accordingly, the time of the CGT event C2 is the date you signed the contract which is in the 201F-1G income year.

As stated above, CGT event A1 (section 104-10 of the ITAA 1G97) is also applicable to the disposal of your Client Register however it is not the most specific CGT event. Even if it had been the most specific event, like CGT event C2, the time of CGT event A1 is when you entered into the contract (subsection 104-10(3) of the ITAA 997) which in your case is the 201F-1G year of income.

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