Edited version of your written advice

Authorisation Number: 1012942140887

Date of advice: 29 February 2016

Ruling

Subject: Contract - date of contract for CGT purposes

Question 1

Did CGT event A1 happen upon the signing of the contract to dispose of the land in the relevant income year?

Answer

Yes

Question 2

Did the execution of a letter agreement by the parties to the contract for the sale of land effectively alter the contract date for the purpose of calculation of capital gains tax?

Answer

No

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant Facts

XYZ, as Trustee for the ABC Trust ('you') entered into a contract for the disposal of land which you owned using a pro-forma 'contract for sale of land or strata title by offer and acceptance (commercial)' ('contract for sale').

The land was subject to Memorial MO 123 pursuant to the Contaminated Sites Act 2003.

The contract for sale recorded the sale of the property.

The terms of the contract for sale included 'A deposit of several hundred thousand dollars of which $- is paid now and the balance to be paid within 5 days of acceptance….'

According to the purchaser, the full deposit was paid 'In or about 20XX' in the same month the contract was signed.

The contracted Purchase Price was originally $XX,000,000. However, this appears to have been amended upwards by around 20% in 20XX (as initialled) and then downwards by a similar amount by an amendment, also in 20XX.

According to the contract for sale, the settlement date was a date in 20XX or 14 days after the removal of the Memorial MO 123 whichever the latest.

There was no finance clause or termination clause in the contract for sale.

The 'Special Conditions' identified in the contract were as follows:

1. The GST Annexure shall form part of this contract.

2. The Vendor confirms they will be responsible for lifting Memorial

Contaminated Sites Act 2003 - MO 123 prior to settlement and decontaminating the site to a standard acceptable to State and Local Authorities to allow the property to be developed (for the stated purpose).

In an amendment initialled and dated in 20XX, this latter sentence was amended to include the words 'As per its current zoning of R111'.

There was no clause specifying a completion date for the contract or stating that time was of the essence.

The representative for the purchaser signed the contract for sale in 20XX.

The representative for you signed the contract for sale the next day.

Both you and the purchaser contend that the contract date was a particular date in 20XX.

In a letter in the 20XX-XX income year, the relevant government body advised the taxpayer of the remediated site classification for the property. In particular, the letter confirmed that the property had been 'remediated for restricted use', and advised the taxpayer to disclose this to the new owner if the site was sold.

In the 20XX-XX, Memorial MO 123 was removed, which fulfilled part of 'special condition' 2 as quoted above.

However, on the same day, Memorial N789 was also 'registered as an encumbrance on the title of the property.

Pursuant to the Contract, settlement should have occurred '14 days after the removal of the Memorial MO 123'.

It appears neither party attempted to reach settlement on the contracted settlement date (i.e. 14 days after Memorial MO 123 was removed).

The taxpayer is stated to have informed the purchaser subsequently that the settlement date was a particular date in the 20XX-XX income year.

A 'without prejudice' letter was sent by the Director and CEO of the purchaser to you in the 20XX-XX income year, expressing concerns about the new Memorial registration, and making an amended offer of purchase. The letter states, in part, that:

While we wish to proceed with our proposed purchase and development of the…property, a matter of significant concern has arisen which we could not have anticipated and you kindly agreed to meet and discuss the issue.

In part, the letter further states that:

…we contend that a resolution of our concern needs to be found…

….

We consider that there are two options available under these unforeseen circumstances. Firstly, to serve a Contract Termination notice or, alternatively, undertake full site remediation works to cause the new Memorial to be lifted from the Title. This latter option is preferred given our desire to proceed with development of the site.

….

Rather than expect (the vendor) to defer further the settlement, (we, the purchaser) will look to undertake the additional remediation works following settlement subject to a $X00,000 reduction in the Purchase Price as a shared contribution to the required remediation…

….

We look forward to your favourable response to what we consider a conciliatory solution. An early response would be appreciated given the timing of the prevailing Notice provisions of (a particular date in) 20XX.

In the 20XX-XX income year a 'Notice of termination of contract for sale and purchase of land' ('notice of termination') was prepared, signed and dated by the solicitor for the purchaser, who were stated in the letter to be the 'Buyer's Representative'. The letter stated, in part, that:

G. The purpose for which the Buyer purchased the property was for (a particular type of) development (Buyer's Purpose).

H. The Buyer's Purpose was known to the Seller as at the Contract Date.

It was stated to be an 'implied term of the Contract' both that:

I. …as at the settlement date of the Contract, the property would be reasonably fit for the Buyer's Purpose (Purpose Term) [and]

J. …following compliance with special condition 2, no further memorial would be registered as an encumbrance on the title of the property (Memorial Term).

It was thus contended that:

M. Memorial N789 unreasonably affects the Buyer's Purpose, by reason of which the Buyer's Purpose cannot now be reasonably achieved.

It was thus further stated that:

O. The Purpose Term has been breached by the registration of Memorial N789.

P. The Memorial Term has been breached by the registration of Memorial N789

The notice concluded by stating that:

1. The Buyer hereby gives notice that it terminates the Contract on the basis of, but not limited to, the matters set out above.

2. The Deposit paid by the Buyer under the Contract must be repaid to the Buyer pursuant to clause 1.2 of the General Conditions.

3. If the Deposit has been invested by the Deposit Holder the Buyer is entitled to the interest on the Deposit pursuant to clause 1.9 of the General Conditions.

According to information provided to the ATO, the notice of termination was hand delivered to your representative in the 2015-16 income year.

Following the delivery of the notice of termination a 'Letter Agreement' was executed as a Deed on the same day by you and the purchaser. The Letter Agreement stated that:

1. This letter agreement amends a Contract of Sale by Offer and Acceptance made between the Seller and Buyer and dated XX Month 20XX (the Contract) wherein the Seller agreed to sell and the Buyer agreed to buy the property known as (street address), the whole of the land (the Land).

2. The Seller and the Buyer hereby amend the purchase price in the Contract from $XX,000,000 to $YY,000,000.

No other amendment conditions were indicated.

According to information available to the ATO, the purchaser acquired the land for $YY,000,000. The 'Sale Date' is recorded as 'XX Month 20XX'.

Settlement was in the 20XX-XX income year.

You made a private ruling application in 20XX.

During the course of a telephone conversation between the director of the vendor entity and the ATO case officer in the 20XX-XX income year, the director is reported to have stated that the taxpayer had spent around several hundred thousand dollars on remediating the land. Regarding the notice of termination of the existing contract, the director is reported as stating that they believed they 'had a position', as they had remediated the land as per the contract, and that the council had then wanted new remediation.

The director is also reported as having stated that they had 'started the deal all over again' with the new contract.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 104-10;

Sale of Goods Act 1895 (WA) Section 60;

Contaminated Sites Act 2003 (WA).

Reasons for Decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

The time at which CGT event A1 happened to the land owned by the taxpayer for the purpose of subsection 104-10(3) was the date of the contract for sale, not the date of the Letter Agreement.

Detailed Reasons

Pursuant to subsection 104-10(1)

CGT event A1 happens if you dispose of a CGT asset.

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.

Application to your circumstances

You contend that the contract which resulted in CGT Event A1 was the Letter Agreement executed in the 20XX-XX income year, not the 'contract for sale', which you state was entered into in 20XX-XX income year.

It is arguable that there are two 'contracts', being the contract for sale and the Letter Agreement.

Thus, it is necessary to determine which, is the relevant agreement for the purposes of subsection 104-10(3).

In particular, it must be determined whether the contract for sale was terminated and thus whether the Letter Agreement represented a new contract for the disposal of the property.

Was the contract for sale validly terminated?

It is a common law principle that once a contract is terminated, it cannot later be affirmed.

In the 20XX-XX income year a 'Notice of termination of contract for sale and purchase of land' was prepared, signed and dated by the solicitor for the purchaser.

A notice of termination will only be effective where the party is entitled to terminate the contract. As per the recent Supreme Court of NSW decision in Champion Home Sales Pty Limited v. DCT Projects Pty Limited [2015] NSWSC 616, where a party is not entitled to terminate a contract, any purported termination could simply amount to a wrongful repudiation by this party, thereby entitling the other party (or parties) to terminate the contract (Ball J at para 120).

Express terms of contract

Under the express terms of the contract for sale (which was the subject of the notice of termination), the taxpayer had simply confirmed that they would:

…be responsible for lifting Memorial Contaminated Sites Act 2003 - MO 123 prior to settlement and decontaminating the site to a standard acceptable to State and Local Authorities to allow the property to be developed (for the stated purpose).

You did secure the lifting of MO 123

Further, the contract for sale did not contain:

• a date by which the terms of the contract (including the decontamination of the site) were required to be fulfilled; or

• a clause stating that time was of the essence.

Further, the contract did not contain a specific termination clause setting out the conditions under which a right to terminate would arise.

Thus, the express terms of the contract for sale do not appear to provide valid grounds for termination.

Implied term

Indeed, in their notice of termination dated in the 20XX-XX income year, the purchaser only contended that the taxpayer had breached a number of 'implied' terms in the contract for sale.

In the notice of termination, it was stated to be an 'implied term of the Contract' both that:

• …as at the settlement date of the Contract, the property would be reasonably fit for the Buyer's Purpose (Purpose Term) [and]

• …following compliance with special condition 2, no further memorial would be registered as an encumbrance on the title of the property (Memorial Term).

However, some consideration needs to be given as to whether such terms could actually be implied. As stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24:

…the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. So in Heimann v The Commonwealth [1938] NSWStRp 47; (1938) 38 SR (NSW) 691, at p 695 Jordan C.J., citing Bell v. Lever Brothers Ltd. [1931] UKHL 2; (1932) AC 161, at p 226 , stressed that in order to justify the importation of an implied term it is "not sufficient that it would be reasonable to imply the term. . . . It must be clearly necessary"….

The conditions necessary to ground the implication of a term were summarized by the majority in B.P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council (1977) 52 ALJR 20, at p 26 : "(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract." (at p346-47)

Implied terms identified by purchaser

1. Fit for purpose

In seeking to terminate the contract for the sale of land, one of the grounds forwarded in the notice of termination was that it was an implied term of the contract that:

…as at the settlement date of the Contract, the property would be reasonably fit for the Buyer's Purpose (Purpose Term) (emphasis added)

Fitness for purpose is a term ordinarily applied to the sale of goods.

Pursuant to section 60 of the Western Australian Sale of Goods Act 1895:

goods include all chattels personal other than things in action and money. The term includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

'Chattels' is not defined in the Sale of Goods Act 1895. According to the Macquarie Dictionary, 'chattels' means:

plural noun 1.  movable articles of property.

2. Law

a.  chattels personal, articles of property both movable and intangible, including debts, patents, copyrights, etc.
b.  chattels real, a leasehold interest in land.

As the definition of' goods' and 'chattels' does not apply to land, it can be questioned whether 'fitness for purpose' could be relied upon as a grounds for the termination of a contract for sale of land.

3. New Memorial

The notice of termination also contends that it was an implied term of the contract that '…no further memorial would be registered as an encumbrance on the title of the property (Memorial Term)'.

The imposition of Memorial N789 arguably prevented you from immediately meeting the second part of special condition 2.

It was contended that:

Memorial N789 unreasonably affects the Buyer's Purpose, by reason of which the Buyer's Purpose cannot now be reasonably achieved.

Given your contractual responsibility for '…decontaminating the site to a standard acceptable to State and Local Authorities to allow the property to be developed (for the stated purpose), it was arguably an implied term that no further Memorial would be imposed on the property following the removal of Memorial N789.

Reasonable time

However, even if such an implied term is accepted, based on the wording of the special condition 2, and indeed of the contract for sale as a whole, there was no date provided by which the taxpayer was required to meet this part of the condition. There was also no clause of the contract stating that time was of the essence.

In his judgment in the Supreme Court of Queensland case Restoration Island Pty Ltd v. Longboat Investments Pty Ltd & Anor [2012] QSC 208, Henry J stated at paragraph 22 that:

…the general principle that where there is no express provision as to when an act required by the terms of a contract is to be performed then, in the absence of indications to the contrary, it is to be performed within a reasonable time. The implied term is so obvious as to go without saying and is obviously necessary to give business efficacy to the agreement.

Thus, it is arguable whether it was an implied term of the contract that the land would be free of contamination before the purchaser took legal possession of the property, and that this would occur within a reasonable period of time. The issuing of Memorial N789 would certainly have hindered your ability to meet such an implied term.

However, as stated by Brennan J in Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537; [1982] HCA 29 (Perri) at 568:

What is a reasonable time is a question of fact and depends upon the circumstances. Its limit is determined by reference to what is fair to both parties.

In this current case, the notice of termination was issued by the purchaser less than two months after the imposition of Memorial N789. It is therefore questionable whether the purchaser provided you with a reasonable time to address this new (and presumably unexpected) additional Memorial.

Further, were the purchaser to consider that the contract was unlikely to be performed within a reasonable time, and in the absence of a specific term in the contract for sale, the purchaser could have nominated a time which was considered to be reasonable, and if the seller did not complete by this date, use this as evidence of repudiation by the seller. (refer Gibbs CJ in Louinder v. Leis 149 CLR 508; [1982] HCA 28 at 513).

This did not occur in this current case.

In Perri, it was determined that where a reasonable time to fulfil a condition of contract had elapsed, there was no requirement to issue a notice for completion before issuing a notice of termination of the contract. However, in that case, the prior Supreme Court decision actually established that a reasonable time to complete had elapsed, and this reasonable time period had been 'common ground' between the parties (refer Gibbs,CJ at 547, Mason J at 556 and Wilson J at 562).

By contrast, it had not been established that a reasonable time period had actually elapsed in relation to the contract currently under consideration.

No evidence has been provided, for example, that you accepted a reasonable time had elapsed and thus accepted the termination of the contract by the purchaser. Indeed, during the course of a telephone conversation between the director of the vendor entity and the ATO case officer in 20CC, the director is reported by the case officer to have stated, regarding the existing contract [contract for sale], that the taxpayer believed they 'had a position', having spent several hundred thousand dollars on remediating the land to secure the lifting of Memorial MO 123. This suggests that you did not accept there were valid grounds for termination of the contract.

Based on these factors, it is uncertain whether the purchaser had validly terminated the contract for sale.

To summarise, although a written notice of termination of the contract had been delivered to the vendor, the grounds for the termination were contentious. Further, even if these grounds were accepted by all parties, a reasonable time to fulfil the implied condition had not elapsed, and there was no attempt by the purchaser to either nominate or provide a reasonable time for this condition to be fulfilled, after which a termination of contract notice may have been effective.

In short, there is significant uncertainty regarding the validity and acceptance of the termination of the contract for sale, and this is evident in your subsequent conduct and that of the purchaser, as set out in the following section.

Conduct of contracting parties

The wording of the Letter Agreement signed by both parties in 20XX is, for example, inconsistent with the stated termination of the contract for sale.

The Letter Agreement of the 20XX-XX income year states that:

1. This letter agreement amends a Contract of Sale by Offer and Acceptance made between the Seller and Buyer and dated XX Month 20XX (the Contract) wherein the Seller agreed to sell and the Buyer agreed to buy the property known as (street address), the whole of the land (the Land).

2. The Seller and the Buyer hereby amend the purchase price in the Contract from $XX,000,000 to $YY,000,000.

The Letter Agreement clearly shows that the parties agreed to amend the purchase price in the contract for sale. This is inconsistent with the valid termination of the contract, and consequent inability of either the taxpayer or purchaser to require specific performance of the contract for sale.

Further, the Letter Agreement is wholly consistent with the purchaser's stated intention as outlined in the letter the 20XX-XX income year from the Director and CEO of the purchaser entity (which pre-dates the notice of termination). This letter stated, in part, that:

While we wish to proceed with our proposed purchase and development of the…property, a matter of significant concern has arisen which we could not have anticipated and you kindly agreed to meet and discuss the issue.'

The letter further states that:

…we contend that a resolution of our concern needs to be found…

….

We consider that there are two options available under these unforeseen circumstances. Firstly, to serve a Contract Termination notice or, alternatively, undertake full site remediation works to cause the new Memorial to be lifted from the Title. This latter option is preferred given our desire to proceed with development of the site.

The letter proposes that:

Rather than expect the vendor to defer further the settlement, the purchaser will look to undertake the additional remediation works following settlement subject to a $X00,000 reduction in the Purchase Price as a shared contribution to the required remediation…

The Letter Agreement thus represents the fulfilment of this stated intention and, subject to the amendment of the sale price, constitutes the fulfilment of the contract for sale.

Thus, the purchaser's letter of 'month' set out two opposing courses of action - termination or amendment. While both courses were embarked upon to a degree, the better view is that execution of an amendment to the original contract was the course more completely and effectively taken by the parties.

Does the amendment create a new contract?

As stated above, the Letter Agreement was stated to be an amendment to the contract for sale.

The effect of amendments to an existing contract was specifically considered by the High Court in FC of T v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35; 2000 ATC 4378; (2000) 44 ATR 370 (Sara Lee).

In that case, an original contract dated 31 May 1991 was amended on 30 August 1991 to increase the sale price by $1,000,000, as well as to assign some the purchaser's rights under the sale to a related third party.

In Sara Lee, the parties to the original contract had amended the contract in the following manner:

Section 11 of the amendment agreement provided:

``Effect on Agreement. This Amendment to Purchase and Sale Agreement shall be deemed an amendment of the Agreement for purposes of Section 12.6 of the Agreement. Except as provided in this Amendment and in any other agreement executed by the parties on or after May 31, 1991, the Agreement remains in full force and effect.'' (at para 13, 4381)

In their joint judgment in this case, Gleeson CJ, Gaudron, McHugh and Hayne J noted at paragraphs 22 to 24 that:

22 When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. In the present case, if the effect of what occurred on 30 August 1991 had been to rescind the agreement of 31 May 1991, then that would go a long way towards providing an answer to the appellant's argument that the assignment which occurred on 30 August was pursuant to the agreement of 31 May, with whatever that entails for the application of Pt IIIA of the Act.

23. In Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd^[ [Tallerman] Taylor J said:

``It is firmly established by a long line of cases... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement.''

24. That passage was cited with approval by Wilson and Dawson JJ in Dan v Barclays Australia Ltd. It accords with principle and with authority. (at 4382-83)

Thus, the joint judgment concludes at paragraph 25 that:

It is clear that the parties to the agreements of 31 May and 30 August 1991 did not intend that the agreement of 31 May should be wholly rescinded. That is apparent from a number of the provisions of the 30 August agreement. In particular, it was made clear by s 11 of the 30 August agreement, which has been quoted above. This is hardly surprising. The agreement of 31 May had worldwide operation, and covered many dispositions and acquisitions that were unaffected by the alterations proposed in relation to Australia. It is also to be observed that the deed of assignment executed by the respondent and Nicholas Products Pty Ltd on 30 August 1991 recited that it was entered into pursuant to the agreement of 31 May 1991, as amended. The manifest intention of the parties was not that the agreement of 31 May 1991 should be wholly rescinded and replaced by a new agreement, but that the rights and liabilities under, and the mode of performance of, the agreement, should be varied in certain respects. (at 4383) (emphasis added)

Application to your circumstances

In determining whether the effect of the Letter Agreement of Month 20XX is to bring an end to the original Contract of Sale of XX Month 20XX, we look to the express terms of the Letter Agreement:

1. This letter agreement amends a Contract of Sale by Offer and Acceptance made between the Seller and Buyer and dated XX Month 20XX (the Contract) wherein the Seller agreed to sell and the Buyer agreed to buy the property known as (street address), the whole of the land (the Land).

2. The Seller and the Buyer hereby amend the purchase price in the Contract from $XX,000,000 to $YY,000,000.

As per the judgment in Tallerman, quoted with approval in Sara Lee, '…the determining factor must always be the intention of the parties as disclosed by the later agreement'. The clear intention of the parties in this current case was to amend the contract for sale, rather than to rescind the contract for sale and enter into a new contract. As per the decision in Sara Lee, the first term of the Letter Agreement expressly refers to an amendment to the terms of the 'contract of sale' dated XX Month 20XX. The Letter Agreement does not state that this contract had been terminated. As with the taxpayer in Sara Lee, it can be concluded in this current case that:

The manifest intention of the parties was not that the agreement of [Month 20XX] should be wholly rescinded and replaced by a new agreement, but that the rights and liabilities under, and the mode of performance of, the agreement, should be varied in certain respects.

The Letter Agreement affirms the continued operation of the contract for sale. The only express amendment to the terms of the contract for sale is the sale price. Despite the proposal outlined by the purchaser's representative in the letter in the 20XX-XX income year, there is no express amendment in relation to the remediation (special) condition in the contract for sale. This may suggest either acceptance by the parties that the special condition in the original contract had, in fact, been fulfilled by the vendor, and so required no further amendment (i.e. there was no breach of implied terms), or that the shift in responsibility to remediate the land from you, the vendor, to the purchaser was an implied term of the Letter Agreement.

On this latter possibility, exactly why the issue in dispute between the parties would not be dealt with expressly in the new agreement is unclear.

Regardless, the terms of the Letter Agreement do not support your contention that you had 'started the deal all over again' with the new contract. In accordance with the decision in Tallerman, the intention of the parties to continue performance of the original contract (with amendment to the sale price) is the determining factor as to whether the contract for sale had actually been rescinded.

Thus, our view is that the amendments to the contract for sale do not constitute the creation of a new contract. That is, in accordance with the decision in Sara Lee, it is considered that CGT event A1 happened in relation to the taxpayer's land on the date the contract for sale was entered into, not the date of the Letter Agreement.

Therefore, our view is that CGT event A1 happened on the date of the contract for sale, being in the 20XX-XX income year.