Edited version of private ruling

Authorisation Number: 1011868239913

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Subject: Disposal of assets

Subject Time of disposal of Capital Gains Tax asset- the time the contract for disposal is entered.

Issue 1

Question 1

Did the Company enter into the contract upon the satisfaction of the last of the conditions precedent on a day in February 2011 for the disposal of CGT assets for the purposes of paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

No.

This ruling applies for the following period

1 January 2010 to 31 December 2010.

The scheme commenced on

1 January 2010.

Relevant facts

· the Company is a subsidiary of X Company.

· the Company and various companies signed a Sale and Purchase Deed (the Deed) on a day in December 2010.

· Pursuant to the Deed, the Company agreed to sell various CGT assets.

· The CGT assets disposed of under the contract were acquired by the Company after September 1985.

· A copy of the Deed was provided to the Commissioner. This document forms part of the facts.

· A Clause of the Deed required Foreign Investment Review Board approval. This condition was satisfied.

· A Cause of the Deed required indicative Ministerial Approval. This condition was satisfied.

· A Clause of the Deed required pre-emption waivers. This condition was satisfied.

· The 'Definitions' contained at a clause of the deed defined the following terms:

· the 'effective date' of the contract,

· the 'Cut Off Date' of the contract, and

· the 'completion date' of the contract.

· All relevant clauses were supplied to the Commissioner in the Deed.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

A CGT event A1 happens if you dispose of a CGT asset. Paragraph 104-10(3)(a) of the ITAA 1997 provides that the event happens when you enter the contract.

The Deed you entered contains certain conditions precedent.

The preferred view is that the conditions precedent of the Deed are conditions which are precedent to a party performing his part of the contract, and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment.

The date you entered the Deed is when you executed the on a day in December 2010. Accordingly, for the purposes of paragraph 104-10(3)(a) of the ITAA 1997 the CGT event A1 to dispose of the CGT assets happens on that day in December 2010.

Detailed reasoning

Section 104-10 of the ITAA 1997 applies when there is a disposal of a CGT asset. Subsection 104-10(3) of the ITAA 1997 relates to determining the time of the event, it states:

104-10(3) The time of the event is:

(a) when you enter into the contract for the disposal; or

(b) if there is no contract-when the change of ownership occurs.

There was a disposal of various CGT assets under the Deed that completed on a day in February 2011. The time of the CGT event A1 is when the contract for the disposal was entered. You executed the Deed on a day in December 2010.

The Deed contains conditions precedent. The conditions precedent need to be examined to determine if they are a condition precedent to the formation of the contract, or whether it is a condition precedent to performance of the contract.

Effect of Conditions

A Clause of the Deed contains 'Conditions Precedent'. The Clause states that certain other Clauses of the Deed do not become binding on the parties, and are of no force or effect until such time that all of the conditions are met. These clauses relate to the 'Sale of Package Interests' and 'Completion'.

The case law in relation to conditions in contracts shows that generally conditions are viewed as conditions precedent to an obligation of a party to perform their part of the contract. To find the alternative, that a condition is precedent to the formation or existence of a contract requires the contract read as a whole plainly to compel this conclusion.

Mason J in the case of Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 (Perri's case) stated at 552:

There is an obvious difference between the condition which is precedent to the formation or existence of a contract and the condition which is precedent to the obligation of a party to perform his part of the contract and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment. In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled. In the second category there is a binding contract 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 non-fulfilment entitles him to terminate.

Conditions precedent within the first category may produce different consequences. In most cases, but perhaps not in all, a party may be able to withdraw from the transaction before fulfilment of the condition. But in each class of case, the transaction creates no enforceable rights in respect of the subject matter of the transaction unless the condition is fulfilled because, until the occurrence of that event, there can be no binding contract. …

Generally speaking the court will tend to favour that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract which makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion.

Similar guidance is also found in Scott v Rania [1966] NZLR 527 (Scott's case) per Honour North J at 531 and Just Jeans Pty. Ltd. v Federal Commissioner of Taxation 86 ATC 4255 per Ormiston J at 4267.

Alternative means of completion

A Clause of the Deed provides for termination of the Deed by written notice in two situations. One of these situations is if completion has not occurred by the Cut Off Date because of a Prohibition Order under another clause of the Deed.

A Clause in the Deed states that in the case of a Prohibition Order, the parties must confer in good faith to find an alternative way to complete if possible.

A Clause in the Deed states that after a number of days if the parties have not found an alternative basis to complete that any party may terminate the deed by written notice.

The existence of these clauses in the Deed support the conclusion that the clause around 'Conditions Precedent' is not required to have been met before enforceable rights are created under the contract. This is because other clauses ensure that alternative means for completion are considered, and pursued if possible before termination.

Waiver of conditions precedent

A Clause of the Deed provides for a waiver of the conditions precedent clause if both parties agree. A Clause outlines the steps required for a waiver and variation.

A waiver would only be able to be exercised by a party if an existing enforceable right exists. It is noted in this case that the waiver requires agreement by both parties.

The effect of a waiver has been considered in Scott's case. That case involved the sale of a residential property. McCarthy J at 535 commented that 'with a condition subsequent it may be easier to find a waiver or election.'

It would follow that the Deed allows for the waiver of the conditions precedent clause. This would suggest that the proper construction of the conditions precedent clause is as conditions precedent to performance of the contract.

Termination rights

Clauses of the Deed contain the ability to terminate the Deed. These clauses operate from the date the Deed is executed until completion.

This means that from the date the Deed is executed binding obligations are created between the parties that may be terminated under these clauses. The termination rights are in existence, notwithstanding that the conditions precedent may not yet be met.

This would suggest that the proper construction of the conditions precedent clause is as conditions precedent to performance of the contract.

Rights commencing from date of Deed

Clauses of the Deed are drafted to apply from the Date of the Deed until completion. This acknowledges the need to govern rights and obligations from the date the Deed is executed until completion.

These rights and obligations apply regardless of the conditions precedent being met. This would suggest that the proper construction of the conditions precedent clause is as conditions precedent to performance of the contract.

Effective date earlier then Execution date

The Deed was executed after the effective date. The date that you entered into the Deed is the date that you executed the Deed, and this is not changed by an earlier effective date specified in the Deed.

Conclusion

The case law has established that a condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion.

When the Deed is viewed as a whole there are clauses that do not support a conclusion that the clause containing conditions precedent needs to be met before the formation of a contract between the parties. These clauses are found in the Deed.

It cannot be said that the contract, when read as a whole, plainly compels the conclusion that the conditions precedent are to be construed as a condition precedent to the formation of a contract.

The preferred view is that conditions precedent in the Deed are conditions precedent to performance.

Given the above you entered the Deed on a day in December 2010 when you executed the Deed.

For the purposes of paragraph 104-10(3)(a) of the ITAA 1997 the CGT event A1 to dispose of the CGT assets happened when you entered the Deed on a day in December 2010.