Edited version of private advice

Authorisation Number: 1052109691865

Date of advice: 10 May 2023

Ruling

Subject: CGT - event A1 - disposal

Question 1

Did the CGT event occur for the purposes of paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) on the contract date?

Answer

Yes.

Question 2

Did the CGT event occur for the purposes of paragraph 104-10(3)(a) of the ITAA 1997 upon the approval of the lease by the landlord?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You operated a business.

You sold the business by contract dated Date A.

You have provided relevant clauses of your agreement which detail the obligations of the parties, including that the vendor could rescind the contract if the lease for the business premises was not approved by the landlord.

The lease agreement between the purchaser and landlord was executed on Date B.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

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 paragraph 104-10(3)(a)

Reasons for decision

Summary

There were no conditions precedent to the formation of the contract to dispose of the property that affect the time of making of the contract. Therefore, the CGT event occurred when you entered into the contract for the disposal on Date A.

Detailed reasoning

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). You dispose of a CGT asset if a change of ownership occurs from you to another entity (subsection 104-10(2) 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 (subsection 104-10(3) of the ITAA 1997).

For general law purposes, the time when a contract is entered into is the time when it comes into existence. The timing may also depend on the terms and conditions of the contract and any relevant legislation.

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. In the first case, the contract does not come into existence until the condition is met. In the second case, the condition does not prevent the creation of the contract - non-fulfilment of the condition merely entitles a party to terminate the contract (see Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537) (Perri).

The nature of a condition (that is whether it is a condition precedent to the formation of a contract) depends on the proper construction of the terms of the contract. However, as pointed out by Mason J in Perri, generally speaking a court will tend to favour a construction which leads to the conclusion that a particular stipulation is a condition precedent to performance (as against a construction which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract).

There have been many cases where a contract is expressed to be subject to the obtaining of the consent pf some person or body. In Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 a contract for the sale of land was expressed to be 'subject to and conditional upon the approval of the Beaudesert Shire Council to a plan of subdivision within six (6) calendar months' and it was further provided that if such approval was not obtained the purchaser would be entitled to cancel the contract. It was held that the approval was a condition precedent to the obligation to complete the contract, not as a condition precedent to the formation of the contract.

In your case, the condition that the approval by the lessor of the terms of a lease between the lessor and the purchaser was not a condition precedent to the formation of the contract for sale. It was a condition precedent to performance of the contract where if not fulfilled, the vendor could have rescinded the agreement and terminated the contract. As such, for the purposes of paragraph 104-10(3)(a) of the ITAA 1997 you are considered to have entered into the contract on Date A and CGT event A1 happened at that time.

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