Edited version of private advice

Authorisation Number: 1051974661496

Date of advice: 14 June 2022

Ruling

Subject: CGT - oral family agreement

Question

Is the Property considered to be acquired before 20 September 1985 such that any capital gain or loss made on a disposal of the Property is disregarded in accordance with paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

MMDDYYYY

Relevant facts and circumstances

In 19XX farmland was purchased by Person A, Person B, Person C and Person D as tenants in common with equal shares. The four taxpayers commenced a farming business called Partnership One. There is no formal deed of partnership between the partners.

It was claimed that upon ending Partnership One the land would transfer back to Person A and Person B.

Partnership One ceased. Subsequently, Person C and Person D commenced a new partnership called Partnership Two.

During the operation of Partnership Two, the land was leased from Person A and Person B. There was no written lease agreement between the parties. The financial statements show an expense 'Lease'. The financial statements do not specify what the 'Lease' is for.

Partnership Two ceased.

There was a debate between the parties on what was an equitable resolution for the assets.

In 19XX a Deed of Dissolution (the deed) was prepared dissolving Partnership One at a date pre-CGT.

There was no purchase or sale contract for the land.

Stamp duty was assessed post CGT.

The Certificate of Title transfer is dated post CGT.

The land was subsequently sold in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 109-5

Reasons for decision

CGT event A1 occurs if you dispose of a CGT asset (s104-10(1) of the ITAA 1997).

When CGT event A1 happens, the asset is acquired when the disposal contract is entered into, or if none, when the entity disposing of the asset stops being the asset's owner (subsection 109-5(2) of the ITAA 1997).

A contract is required to have the attributes prescribed by common law for the formation of a contract. Generally, a binding contract is entered into where one party communicates unconditional acceptance of an offer made by the other party. In some cases, difficulty may arise in determining at what point of time a binding contract is made. This is particularly so in the case of a contract that is wholly or partly oral.

An oral contract may be a contract, provided it has the attributes required by common law, for example, an intention by both parties to be bound by it.

Where a contract is claimed to have been entered into, the particular facts of the case are important to determine if that was actually the case. This will be relevant, for example, when a contract is claimed to have existed because of oral agreements, or when a formal contract has not been executed and exchanged for some property transactions.

Oral contracts may be enforceable by the Courts under the doctrine of part performance if a certain test is met. This test was developed in the case of Maddison v Alderson [1883] 8 App Cas 467, which determined an agreement may be enforceable despite the statutory requirement of a written contract, if the following criteria were met:

•         The oral agreement was partly performed; and

•         The acts relied upon as part performance are unequivocally, and in their own nature, referable to some such agreement as alleged.

In the case of Phung v Phung [2019] NSWSC 117; (2019) 19 BPR 39, 107, the Court upheld the doctrine of part performance in relation to oral contracts for sale of property, in that the actions of the older brother were 'unequivocally referable' to the oral contract that had been formed between the brothers. Clear actions such as taking possession of the property, paying for outgoings, undertaking renovations, and paying consideration for the property all amounted to an unmistakable oral contract that had been formed. The Court held that the property had been validly transferred to the plaintiff due to part performance.

In McDonald v Federal Commissioner of Taxation [2001] FCA 305; (2001) 46 ATR 426; 2001 ATC 4146(McDonald's case), the taxpayers had made an oral offer on 13 September 1985 (pre-CGT) to purchase a property and the vendor accepted the offer. The vendor's solicitors forwarded the contract of sale to the taxpayer on that day and wrote that no legal liability was to attach to either party until exchange had been affected. Exchange did not occur until 31 October 1985 (post-CGT) but the contract was dated 13 September 1985.

The outcome of that case, both at first instance, the decision on remittance and on appeal was that the first time at which a contract at common law was entered into was on 31 October 1985 when written contracts were exchanged.

This convention could be overridden by the parties with mutual intention, but clear evidence of this intention had to be produced. In McDonald's case, the evidence showed that the first time that the parties had reached a consensus with the intention to form legal relations occurred on exchange and the parties could not rewrite history by backdating the contract.

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 particular, it was found on the facts of that case that the McDonalds would not have signed the written contract until all that they said needed to have been resolved had actually been resolved to their satisfaction.

In Gardiner v FC of T 2000 ATC 2018, the letter of offer pre-CGT contained the essential matters to establish a contract. It set out the details of the property to be purchased, the consideration, the amounts to be paid, the timing of the payments and the date of possession. The acceptance letter pre-CGT did not vary any of those matters. The formal correspondence of offer and acceptance thus constituted a contract for the acquisition of the relevant property by the taxpayer. Such a contract was carried into effect with the consequential purchase and disposition of the relevant asset. The AAT held that a property was acquired when a taxpayer's offer was accepted by the vendor, not when the contracts were formally exchanged two months later. The formal correspondence of the offer and the acceptance of it constituted a contract for the acquisition of the property by the taxpayer.

In your case, it was understood between the family that the land would always transfer back to Person A and Person B. Even though it was the intention for this to happen, a formal purchase or sale contract for transfer of the land was never executed. In absence of a formal contract, the Commissioner looks to the doctrine of part performance and an unequivocal reference to an oral contract being formed.

In Phung v Phung there was a clear reference to the part performance of the oral contract. For your case however, the financial statements of Partnership Two shows a 'Lease' expense, but it fails to state what the lease is for. In addition, there is no written lease agreement.

Additionally, a debate between family about an equitable resolution to the partnership assets caused a delay in any agreement. The first time that the family had reached an equitable resolution for Partnership Two's assets is evidenced in the Deed of Dissolution.

The absence of any written purchase or sale contract between the parties leads to the conclusion that no binding and enforceable agreement or contract existed prior 19XX.

Consequently, any family agreement that may have occurred or been intended is not sufficient to show that the land was acquired pre-CGT. There is no unequivocal refence to an oral contract or part performance pre-CGT.

Person A acquired their share of the land at the time when Person C and Person D stopped being the asset's owner, that is, when the Deed of Dissolution was entered into.