Edited version of private advice

Authorisation Number: 1051842434478

Date of advice: 25 May 2021

Ruling

Subject: CGT - timing

Question

Does the CGT event for the share sale happen in the 20XX-XX income year?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

The share sale agreement (SSA) dated xxxx was executed prior to 30 June 20XX. The buyer under the SSA was entity A and entity B was one of the sellers.

A Clause of the SSA contained a number of conditions precedent.

The Cut Off Date under the SSA was xxxx.

The final condition precedent to be concluded was signed after 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. Shares are a CGT asset (section 108-5 of the ITAA 1997).

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. As outlined in subsection 104-10(3) 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.

In this case, there is a contract. The contract contains conditions precedent, so it is necessary to determine when the contract came into existence.

If a contract is subject to a condition, an issue arises whether the condition is a condition precedent to its formation or whether it is a condition precedent to performance of the contract.

Taxation Determination TD 2002/4 Income tax: capital gains: what is the first element of the cost base and reduced cost base of a share in a company you acquire in exchange for a share in another company in a takeover or merger? provides some relevant guidelines. TD 2002/4 says most conditions operate as conditions precedent to performance of a contract that is, they do not prevent the contract from coming into existence and there are generally obligations of a party to perform as part of the contract. In these cases, the contract exists and it is made when the offer is accepted and not when it becomes unconditional. Non-fulfilment of the conditions entitles one or both parties to terminate the contract (see Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537).

However, if an offer is one which is subject to a condition precedent to the formation or existence of a contract, the contract does not come into existence until the condition is satisfied. In such a case, the date of acquisition is the later of the date that the condition is met or the offer is accepted.

The distinction between conditions precedent and conditions subsequent is also elaborated on in Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? As stated in the notes in TD 94/89, the time a contract is made depends upon 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 the contract unless it is a condition precedent to the formation of the contract. Most conditions (for example, standard 'subject to finance' clauses) operate as conditions subsequent to formation of the contract and do not affect the time of making of 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.

The High Court of Australia has considered the distinction between conditions precedent to the formation of the contract and conditions precedent to the performance of a contract in Meehan v Jones (1982) 149 CLR 571. In that case, Gibbs CJ states that every "such case must depend on the particular words of the contract in question, and that it is not profitable to compare with each other cases decided on different contractual provisions".

That is, the status of a particular condition depends on the intention of the parties to the contract as expressed in their contract.

In the current share sale agreement, the language used, effectively means that no contract is formed until the relevant conditions are complied with. That is, it is considered that the contract is explicit in indicating that the contract does not come into existence until the relevant conditions are met.

As the share sale agreement contains a conditional contract that is regarded as a condition precedent to the formation or existence of the contract, the CGT event occurs on the date that the conditions are met, that is on xxxx. It follows that the CGT event A1 happens in the 20XX-XX income year.

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