Edited version of your private ruling

Authorisation Number: 1012139017411

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Subject: CGT - disposal of asset - timing

Question

In relation to the disposal of your shares, under the Share Acquisition Agreement, did the CGT event A1 happen when the agreement was entered into?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commences on:

01 July 2010

Relevant facts and circumstances

You entered into a share acquisition agreement to dispose of shares in a company.

A clause in the agreement states that the completion will not proceed unless and until the conditions precedent, as set out in the agreement, are fulfilled.

Another clause in the agreement states that the conditions precedent, contained in the agreement, are for the benefit of the purchaser and may only be waived by the purchaser.

All of the conditions precedent, as stated in the share acquisition agreement, were fulfilled on completion date.

The completion date was in a different financial year to when you entered into the agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10 and

Income Tax Assessment Act 1997 subsection 104-10(3).

Reasons for decision

Disposal of an asset

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the disposal of a CGT asset causes a CGT event A1 to occur. Subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for disposal or if there is no contract when the change of ownership occurs.

The CGT provisions take the general law as it stands and this means the date 'you enter' the contract must be the date the contract comes into existence for general law purposes.

A contract generally comes into existence at the time an offer is accepted (provided that there is consideration, certainty, intention to create legal relations etc). However, different rules may apply in some circumstances.

Conditions precedent

Conditions to contracts are generally divided into two categories: conditions precedent and conditions subsequent. Although the distinction between conditions precedent and conditions subsequent have been described as largely a matter of words, conditions precedent can be broken up into two further categories and the distinction between these categories can be critical for CGT purposes.

The categories are conditions precedent to the performance of a contract and conditions precedent to the formation of a contract. A condition precedent to the performance of a contract still sees an operative contract come into existence at the date of the acceptance of an offer (and therefore that date is the date you enter into the contract). On the other hand, a condition precedent to the formation of a contract means that no contract comes into existence until the condition is fulfilled. This makes the time of the contract the time the condition (which is precedent to the formation of the contract) is fulfilled.

This distinction between conditions precedent and conditions subsequent is also elaborated on in Taxation Determination 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 (e.g. 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 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 & Anor v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at p 552, 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).

Application to your circumstances

In your situation, the conditions in the share acquisition agreement were for the benefit of the purchaser alone. These were not conditions precedent to the formation of a binding contract; they were in fact conditions precedent to performance of the contract. Non-fulfilment of these conditions merely entitled the purchaser to terminate the agreement prior to completion but did not prevent the creation of it.

Accordingly the time when the contract was entered into, for the purposes of CGT event A1, was the time when the agreement containing the condition was entered into.