Edited version of private advice

Authorisation Number: 1012647108527

Ruling

Subject: Capital gains tax

Questions and answers

1. Did CGT event B1 occur when you entered into the contract with Entity X?

Yes.

2. Can the CGT event be disregarded due to the termination of the contract with Entity X?

Yes.

3. Are you able to amend your assessment to remove the capital gain?

Yes.

4. Will CGT event B1 occur when you enter into a contract with Entity Y?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ending 30 June 20YY

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You purchased a commercial property post 1985.

You entered into a terms contract to sell the property to Entity X several years ago.

In accordance with the terms of the contract Entity X obtained the possession use and enjoyment upon signing the contract.

Entity X paid a deposit and two capital payments along with monthly interest on the unpaid capital amount.

Entity X terminated the contract part way through the term of the contract and prior to settlement.

The contract was cancelled in its entirety.

The contract was terminated and the deposit and the two capital payments were refunded to the Entity X. The interest payments were retained by you.

You have declared the interest payments in your relevant tax returns as income.

You declared the capital gain in your relevant tax return.

You have been successful in finding another purchaser.

A terms contract will be signed by 30 June 20YY between you and Entity Y.

Entity Y will obtain possession, use and enjoyment of the property upon signing the contract.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 104-15.

Income Tax Assessment Act 1936 Section 170.

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening.

If you dispose of a CGT asset to someone else, a CGT event occurs when you enter into the contract for disposal. If there is no contract, the CGT event generally happens when you stop being the asset's owner.

It is usual for a disposal of land to be an A1 event at the time of entering into the contract for the sale of land. However where a term contract is involved the relevant event is B1 where an entity enjoys the use and enjoyment of the asset before the title passes to them.

As per Taxation Ruling TR 94/29 Income tax: capital gains tax consequences of a contract for the sale of land falling through (TR 94/29) where a terms contract is involved for the purchase of land, the change of ownership and hence the disposal and acquisition are taken to occur at the time when possession of the land is given to the purchaser or the purchaser becomes entitled to the receipt of rents and profits. Section 104-15 of the Income Tax Assessment Act 1997 (ITAA 1997), which was in force at the time of the transaction, made it clear that the time of acquisition or disposal would occur when the use and enjoyment of the land was first obtained which would usually occur at the time the contract is made or soon after.

The effect of this section is that any capital gain or loss is required to be declared in the tax return in the year the possession, use and enjoyment was given to the purchaser or the purchaser became entitled the receipt of the rents and profits.

TR 94/29 goes on to point out that if the contract falls through before completion, title to the land will not pass to the purchaser because the purchaser is not entitled to a conveyance or transfer of the land. Under subsection 104-15(4) of the ITAA 1997 a change of ownership is taken not to have occurred if the period for which the purchaser had the use and enjoyment of the land terminates without the title to the land passing to the purchaser. Subsection 104-15(4) states that a capital gain or capital loss you make is disregarded if the title in the asset does not pass to the other entity at or before the end of the agreement.

In your case, you entered into a contract with Entity X. Entity X had the possession, use and enjoyment of the property from the day you entered into the contract.

The contract was terminated and the deposit and the two capital payments were refunded to Entity X. The interest payments were retained by you.

A B1 event occurred at the time of the signing of the contract.

Any capital gain or loss that arose from the B1 event can be disregarded under paragraph 104-15(4) as the event has ceased to exist as there was no change in ownership of the property by transferring the title deed.

Section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) allows you to amend your assessments where you have declared a capital gain or loss and a capital gain or loss has not been realised due to the contract termination and therefore there is no disposal to which the CGT provisions can apply.

You are able to amend your assessment to remove the capital gain you declared in your return as the CGT event has been disregarded due to the contract being terminated by Entity X.

CGT event B1 will occur when you enter into a contract with Entity Y and Entity Y has possession, use and enjoyment of the property or they become entitled to the rent or profits of the property.

You will be required to calculate any capital gain or loss when you enter into the new contract with Entity Y using the CGT calculation method and as there was no compensation from the first contract with Entity X there is no continuum of events and the calculation does not include any amounts from the contract with Entity X in the cost base.