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Edited version of private ruling
Authorisation Number: 1011637926932
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Ruling
Subject: Capital gains tax
Question:
Is the condition within your contract of sale that makes the completion of the contract conditional upon approval from a government planning commission accepting changes to the property boundary a condition precedent to the performance of the contract?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You signed a contract for the sale of your property sometime after 20 September 1985.
The title indicated that the land was a particular number of square metres in size.
You wished to reduce the size of the land, with the variance being added to the adjacent land that you also own.
The contract of sale stipulated that it was subject to a Planning Commission approving the change in boundary.
The new title was issued.
Settlement occurred after the new titles issued.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10.
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Detailed reasoning
Capital gains tax (CGT) event A1 happens when you dispose of an asset. The time of the event is when you enter the contract for the disposal, or if there is no contract, when change of ownership occurs.
A contract generally comes into existence at the time an offer is accepted, however if the contract is subject to certain types of conditions, the timing of the contract may be altered.
Conditions to contracts are generally divided into two categories: conditions precedent and conditions subsequent. Conditions precedent can be broken up into a further two categories; a condition precedent to the formation of the contract or a condition precedent to the performance of the contract. The distinction between the two is important for CGT purposes
A condition precedent to the formation of the contract means that no contract comes into existence until the condition has been fulfilled, that is, the time of the contract is the time that the condition has been met.
With a condition precedent to the performance of a contract, the contract comes into existence at the date of acceptance of the offer, that is, the date you enter the contract. If the condition is not fulfilled the contract would be at an end. Non-fulfilment of the condition merely entitles the party/parties to the contract to end the contract prior to settlement but does not prevent the creation of it. In such case the time when the contract was entered into for the purposes of CGT event A1, would be when the agreement containing the condition was entered into.
In the case Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153, the contract for sale of land was expressed to be "subject to and conditional upon approval of the Beaudesert Shire Council to a plan of division within six (6) calendar months" and it was further provided that is such approval was not obtained the purchaser would be entitled to cancel the contract. It was held that the contract was considered 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 contract be subject to the Planning Commission approving the change in boundary is considered to be a condition to the performance of the contract and as such does not prevent the creation of the contract. Therefore CGT event A1 happened when you entered into the contract.