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Ruling

Subject: Setting aside of contract

Question

Will capital gains tax (CGT) event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) still happen in the income year if the agreement to sell the property is set aside?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You entered into an agreement which provided for, amongst other things, the sale of a property.

The title of the property was subsequently registered to the purchaser.

You are, through your solicitors, taking steps to have this agreement set aside by the courts as being an invalid agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

CGT event A1 under section 104-10 of the ITAA 1997 happens when you dispose of a CGT asset. This CGT event happened when you entered into the contract for the disposal of your property.

In some circumstances, a contract may fall through after completion for reasons which will render the contract void from the beginning, that is, the contract is treated in law as never having come into existence. One example would be where the contract is set aside because of the fraud of one of the parties and the fraud is discovered after completion. In these types of cases the innocent party may rely on the fraud to have the contract of sale declared a nullity from the beginning.

The position from a CGT point of view would then be that a change in the ownership of the CGT asset is taken never to have occurred since the contract of sale was a nullity from the beginning.

In your case, you are taking steps to have the sale agreement set aside by the courts as being an invalid agreement. This is not a case of a contract breach where the contract is no longer binding but is not rescinded as from the beginning.

If, in your case, the contract for the disposal of your property is set aside by the courts, that is, treated as never having come into existence, the change of ownership of your property will be taken never to have occurred, and CGT event A1 will no longer happen in the year in which the contract was entered into.