Edited version of private advice

Authorisation Number: 1052019569241

Date of advice: 15 August 2022

Ruling

Subject: CGT - sale of property falls through

Question 1

Has CGT event C2 or another CGT event happened due to the recission of the sale by the Purchaser at Time A?

Answer

No.

Question 2

Has CGT event C2 or another CGT event happened due to you reaching agreement with the Purchaser to keep the first 5% option fee deposit at Time B?

Answer

No.

Question 3

Has CGT event C2 or another CGT event happened due to you receiving the compensation payment at Time C?

Answer

No.

This private ruling applies for the following periods:

20xx-xx income year

20xx-xx income year

20xx-xx income year

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Nearly XX years ago, you purchased the Property as a single owner and you started to rent it out as an investment property.

You moved into the Property a couple of years later with your family making it your main residence.

You subsequently entered into a Call and Put Option Deed (the Deed) with a potential purchaser (the Purchaser). The other owners entered into similar Deeds (all Deeds were interdependent).

The relevant clauses in the Deed state as follows:

Call Option

To effect the sale of the Property, you granted a Call Option to the Purchaser as an irrevocable offer which must be accepted strictly in accordance with the Deed or otherwise, the Call Option will expire.

The Call Option had to be exercised before the expiration of the Call Option Period. This was set at 18 months from the date of the Deed.

The Call Option Fee was to be 10% of the purchase price. It was to be payable in tranches being:

•         5% on or before the date of the Deed which was allowed to be released to you, and

•         5% on or before six months after the date of the Deed to be held in trust pending settlement.

Put Option

To effect the sale of the Property, the Purchaser granted a Put Option to you as an irrevocable offer which must be accepted strictly in accordance with the Deed or otherwise, the Call Option will expire.

The Put Option had to be exercised before the expiration of the Put Option Period but could not be exercised before the Call Option expired. The Put Option Period ran for the two week period after the Call Option expired.

The Put Option Fee was $xx.xx and had to be paid at the start of the Put Option Period.

The Put Option could not be exercised if the Call Option had been exercised.

Exercise of Option

If an Option is validly exercised, the Grantor and Grantee will be deemed to have entered into the Contract as vendor and purchaser on and from the Option Notice Service Date.

If an Option is exercised, then the Call Option Fee is credited as the Deposit.

The Call Option Fee is kept by the Grantor and the Put Option Fee is kept by the Grantee if neither Option is exercised.

The Purchaser paid you the first instalment of the Call Option (the first 5% option fee deposit) being 5% of the purchase price when you entered into the Deed.

The Purchaser deposited a further 5% (the second 5% option fee deposit) into the Real Estate Agent's Trust Account. You did not receive this amount at that time.

You then moved out of the Property and began to rent it out as an investment property.

The Purchaser did not exercise the Call Option. The Purchaser was unable to obtain development approval for its proposed re-development of the site.

All of the Owners exercised their Put Options by written notice shortly afterward.

The Put Option Fee was not paid by the Owners to the Purchaser, instead being paid into the owners Agent's trust account.

The Purchaser rescinded from the sale at Time A and claimed both deposits back through legal action due to a legal mistake in the Deed. The second 5% deposit was returned to them from the Real Estate Agent's Trust Account immediately by the agent.

You engaged Lawyers to represent you against the Purchaser and your original lawyer who were responsible for the issue in the Deed.

You were still seeking specific performance of the Deed, or alternatively that you be allowed to keep both the first 5% option fee deposit and the second 5% option fee deposit.

You managed to settle with the Purchaser at Time B so that you did not have to return the first 5% deposit (after several court hearings and legal procedures).

You reached a settlement with the insurer of your original lawyers.

You received a payment (the compensation payment) from the settlement with the lawyer's insurer at Time C.

You have incurred legal expenses to achieve the settlement and the compensation.

You have now entered into a new 24 month Put and Call Option Agreement (the New Agreement) with a potential new purchaser shortly after Time C.

Assumption

For the purpose of this ruling, it is assumed that the Property will be sold in accordance with the terms of the New Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-40

Income Tax Assessment Act 1997 Section 116-20

Reasons for decision

Summary

Question 1

CGT event C2 or another CGT event has not happened due to the recission of the sale by the Purchaser at Time A.

Question 2

CGT event C2 or another CGT event has not happened due to you reaching agreement with the Purchaser to keep the first 5% option fee deposit at Time B.

Question 3

CGT event C2 or another CGT event has not happened due to you receiving the compensation payment at Time C.

Detailed reasoning

You have received three payments in relation to the attempted sale of the Property to the Purchaser:

•         the first 5% option fee deposit which you have kept

•         the second 5% option fee deposit which has been returned to the Purchaser, and

•         the compensation payment which you have kept.

The first and third payments will be included in the capital proceeds of a CGT event. The second payment may be included in the capital proceeds of a CGT event depending on which CGT event it relates to.

Your concern is whether these payments relate to a CGT event that has already happened.

Did a CGT event happen when you granted the Call Option?

CGT event D2 happened when you granted the Call Option to the Purchaser.

You make a capital gain from granting the Call Option if the capital proceeds from the grant are more than the expenditure you incurred to grant it.

The capital proceeds include the money you have received, or are entitled to receive, in respect of the CGT event happening. This includes amounts that you will not receive until a later time or that are payable in instalments.

A capital gain you make from the grant of an option is disregarded if it is exercised. The Call Option was not exercised.

Does the first 5% option fee deposit relate to the Call Option or the Deposit?

The Deed has been judicially considered with their decision being that the first 5% option fee deposit should be considered to be an amount paid by the Purchaser toward the purchase of the Property and therefore a Deposit.

The consequence of this statement is that the first 5% option fee deposit will not be considered to be a payment made by the Purchaser to acquire the Call Option. Therefore, it cannot be capital proceeds for the purpose of CGT event D2.

Does the second 5% option fee deposit relate to the Call Option or the Deposit?

The same conclusion must be reached for the second 5% option fee deposit.

Note: the second 5% option fee deposit would not be included among the capital proceeds for CGT event D2 anyway because it has been repaid. The repaid rule being the fourth modification to capital proceeds applies to CGT event D2.

Did a CGT event happen due to the recission of the sale by the Purchaser?

Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits states the Commissioner's view about forfeited deposits.

It states that there are two possible outcomes if a deposit is received by a vendor and then subsequently forfeited by the purchaser:

At paragraph 9 - if the forfeiture occurs as part of a 'continuum of events' constituting a later disposal of the real estate that is the subject of the earlier sale contract, then the forfeited deposit forms part of the capital proceeds for the later disposal.

At paragraph 12 - conversely, if there is no later disposal or any later sale of the underlying asset does not occur within a 'continuum of events' constituting the disposal of that asset, the forfeited deposit cannot form part of the capital proceeds from a disposal of that asset.

In the former case, it does not take on the same character as the sale proceeds for the underlying asset because there has been no disposal of that asset. In the latter case, it does not take on the same character as the sale proceeds for the underlying asset because the forfeited deposit is not material to any later sale of the asset which does not occur within a 'continuum of events' constituting its disposal.

In both of these cases, the vendor's bundle of contractual rights is the most relevant asset. There has been an acquisition and an ending of ownership of these contractual rights by the vendor (CGT event C2 in section 104-25 - about cancellations, surrenders and similar endings of intangible CGT assets).

It notes as a variation at paragraph 13 that the same rules will apply if the forfeited payments are instalments paid under the contract before its termination.

The key element in determining which outcome is applicable relates to whether or not the forfeiture has occurred within a continuum of event constituting a later sale.

The Purchaser rescinded from the sale at Time A and you have entered into the New Agreement about 19 months later. More relevantly, you have entered into the New Agreement less than 12 months after you abandoned your attempts to enforce the sale of the Property under the Deed (and only shortly after you received the compensation payment).

This is within the suggested two year period mentioned at paragraph 17 of TR 1999/19 when coupled with paragraph 57 to constitute a continuum of events as long as a disposal occurs under the New Agreement.

Consequently, the contractual rights under the Deed that ended due to the recission of the sale by the Purchaser are not treated as separate CGT assets for capital gains purposes. The Property is the relevant CGT asset and you continued to own it, so no CGT event has happened due to the recission of the sale by the Purchaser.

Did a CGT event happen due to you reaching agreement with the Purchaser to keep the first 5% option fee deposit?

The same approach will apply when considering if a CGT event has happened due to you reaching agreement with the Purchaser for you to keep the first 5% option fee deposit.

The contractual rights under the Deed that ended due to reaching this agreement are not treated as separate CGT assets for capital gains purposes.

Therefore, no CGT event has happened due to reaching this agreement.

Did a CGT event happen when you received the compensation payment?

Paragraph 14 of TR 1999/19 states that the same rules apply to the receipt of damages as it does to the receipt of a forfeited deposit.

Consequently, for the reasons stated above, the right to sue your original lawyers is not a separate and distinct CGT asset for capital gains purposes because the property is the most relevant asset.

Conclusion

For the reasons outlined above, neither of the 5% option fee deposits received are capital proceeds for the grant of the Call Option because exercising the Put Option changed their nature so that they become deposits toward the purchase of the property.

Likewise, neither the recission of the sale by the Purchaser nor reaching agreement to keep the first 5% option fee deposit is a CGT event because both have occurred during the continuum of events that represents the sale process for the property that began on entry into the Deed and will end with a successful sale under the new Put and Call Option Agreement.

Similarly, the compensation payment is also part of the capital proceeds you will receive due to a successful sale of the property under the new Put and Call Option Agreement.