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Ruling

Subject: capital gains tax

Question 1

Is the property recently sold by the partnership exempt from capital gains tax (CGT) on the basis that it is a pre CGT asset?

Answer

No.

Question 2

Is the property recently sold by the partnership subject to income tax under section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No - this section does not apply to the property as it was acquired after 20 September 1985.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· the documents provided with the application for private ruling and

· the information provided in response to a request for further information.

The partnership owns a property.

The property was originally acquired by an individual on prior to 20 September 1985.

The individual was the relative of one of the partner's in the partnership.

The partner started working as an employee of their relative, who operated a number of businesses on the property.

The business was operated by the individual on his own account and he acquired various pieces of machinery related to the earth moving business.

Prior to 20 September 1985, it was originally agreed that the individual would transfer the business and its various assets to the partnership.

There was no written contract or agreement, it was a verbal agreement.

The two key features of the agreement were that:

· the individual would phase out of the business by reducing their work hours and all decision making would henceforth be done by the new owners, and

· the partnership would immediately assume all the liabilities and commence paying the business expenses incurred by the individual and that the assets were to be utilise by the partnership they now controlled and owned.

In consequence of the sale agreement, the partnership began paying various business expenses of the individual from prior to 20 September 1985.

The payments made by the partnership included the plant hire purchase monthly payments and various other operating expenses.

The individual died in after 20 September 1985.

Prior to their death, the transfer of the land to the new owners commenced as a consequence of the previous contractual agreement.

After 20 September 1985 the land was transferred from the individual to the partnership.

An amount was paid by the partnership as consideration for the land after 20 September 1985.

The partnership continued to use the property for the business after it was acquired.

The property was not subdivided or developed prior to the sale.

Reasons for decision

Question 1

Under paragraph 104-10(5) of the ITAA 1997 a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

Generally you acquire a CGT asset when you become its owner as per section 109-5 of the ITAA 1997. Subsection 109-5(2) of the ITAA 1997 sets out specific rules for the circumstances in which, and the time at which you acquire a CGT asset as a result of a CGT event occurring.

CGT event A1 occurs when an entity disposes of a CGT asset to you. You acquire the asset at the time that the contract is entered into or, if there is no contract, when the entity stops being the asset's owner.

In McDonald & Anor v FC of T 2001 ATC 4146 it was found that the time of the contract was at the time when a binding and enforceable contract was in place. It was found that an oral agreement was insufficient to bind each of the parties to the agreement. It went on to specify that the procedure for exchange of contracts was so entrenched that a party contending for an intention to precede other than in accordance with established procedure, would need clear evidence to support that contention.

In the partnership's case, the absence of any written contract or agreement between the parties has led to the conclusion that no binding and enforceable agreement ever occurred between the partnership and the individual. Therefore, the partnership will have acquired the asset at the time it became the legal owner of the property. This will be the point in time that the title was transferred into the name of the partnership, which occurred after 20 September 1985.

Any future capital gain or loss made by the partnership in respect of the property cannot be disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997 as the property was acquired after 20 September 1985.

Question 2

Subsection 15-15(1) of the ITAA 1997 states your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, under subsection 15-15(2) of the ITAA 1997, section 15-15 of the ITAA 1997 does not apply to a profit that arises in respect of the sale of property acquired on or after 20 September 1985.

In the partnership's case, the property was purchased after 20 September 1985. As the property was purchased after 20 September 1985, section 15-15 of the ITAA 1997 does not apply.