Edited version of private advice

Authorisation Number: 1052123813321

Date of advice: 29 May 2023

Ruling

Subject: CGT asset

Question

Was the land at XYZ acquired prior to DD MM YYYY?

Answer

Yes

This ruling applies for the following periods:

DD MM YYY to DD MM YYY

The Scheme commences on:

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background Facts

1.      At all material times, Taxpayer A was the managing director of Company A. This company was controlled by Taxpayer A.

2.      Taxpayer A was also a director of Company B. This company acts as trustee for the XXX Family Trust ('XXX FT').

Purchase of land

3.      Taxpayer A wrote to Company C on DD MM YYYY, enquiring as to whether any land with frontage to XYZ Road was available for sale.

4.      A Government Department ('the Department') wrote to Taxpayer A on DD MM YYYY advising that there were blocks available to purchase. The letter also provided the indicative purchase price of in the vicinity of $XYZ per hectare.

5.      The Department wrote to Taxpayer A on DD MM YYYY offering land, being XYZ, for sale, at a price of $XYZ for unfilled land, or $ZYX for filled land. The letter estimated the area of land to be XX hectares (subject to survey) and instructed Taxpayer A that to accept the offer, an option fee of x% of the purchase price was payable.

6.      Although there is no record of an option agreement being entered into by the parties, the option fee of $xyz was paid by cheque on DD MM YYYY.

7.      The Department wrote to Taxpayer A on DD MM YYYY confirming that the sale had been approved, and that a short term licence would be issued to enable the survey. It was noted that a deposit of xx% less the option fee would be payable prior to DD MM YYYY. The letter also advised that an agreement for sale commencing DD MM YYYY would be forwarded once the survey was accepted. A copy of the agreement was supplied for information purposes. The purpose of the survey was to confirm the land area, and hence the sales price, as the price was quoted as $XYZ per hectare.

Survey and development of land

8.      The Department forwarded by letter dated DD MM YYYY, a copy of the survey diagram which indicated that the Department was moving forward to having the survey accepted prior to DD MM YYYY.

9.      Taxpayer A wrote to the Department on DD MM YYYY enclosing plans for the development of the property, and also requesting permission to access the land to enable filling prior to the issue of a licence.

10.   The Department wrote to Taxpayer A on DD MM YYYY informing him that the survey had been delayed, and that a licence was expected to commence on DD MM YYYY. The Department notably also granted access to the land (to commence filling the land) effective from DD MM YYYY.

11.   The Department wrote to Taxpayer A on DD MM YYYY confirming that the survey had been accepted, that a payback period of 10 years instead of the usual 5 years had been approved, that the plans for development had been approved, and requested payment of a xx% deposit of $xyz (minus the option fee of $xyz, ie. $XYZ).

12.   The deposit of xx%, less the option fee, totalling $XYZ was paid on DD MM YYYY.

Agreement for sale and purchase

13.   The Department wrote to Taxpayer A on DD MM YYYY enclosing a copy of the Agreement for execution and return within xx days or the agreement and monies previously paid would be forfeited.

14.   An Agreement for Sale and Purchase was executed by the parties on DD MM YYYY. The first paragraph of the Agreement noted that the Agreement was made on DD MM YYYY.

15.   The Land Grant in respect of the property is dated DD MM YYYY.

16.   The XXX FT has confirmed that the provisions of Division 149 of the ITAA 1997 do not apply so as to change the potential pre-CGT status of the CGT assets.

17.   Division 149 stipulates those entities that have pre-CGT assets must be able to demonstrate that the ultimate owners who had the majority underlying interests in the assets at the acquisition date still have the majority underlying interests in those assets. This will be relevant at the time when the land is disposed.

Information provided

18.   You have provided a number of documents containing detailed information in relation to XXX FT's ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Response to further questions provided

19.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1936 (Archive) Subsection 160U(3)

Income Tax Assessment Act 1936 (Archive) Paragraph 160M(3)(d)

Income Tax Assessment Act 1936 (Archive) Subsection 160U(7)

Income Tax Assessment Act 1997 Division 149

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The land held by the XXX FT at XYZ was acquired prior to DD MM YYYY.

DETAILED REASONING

Date 1 - DD MM YYYY

20.   Section 160U of the ITAA 1936 (Archive) outlines "Time of Disposal and Acquisition", stating that subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.

21.   Specifically, subsection 160U(3) of the ITAA 1936 (Archive) states that if:

'the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.'

Date 2 - DD MM YYYY

22.   Subsection 160U(7) of the ITAA 1936 (Archives) states that where the acquisition or disposal of the asset occurred as a result of a transaction referred to in paragraph 160M(3)(d), the time of acquisition or disposal shall be taken to have been the time when the 'use and enjoyment' of the asset was first obtained by the person mentioned in that paragraph.

23.   Paragraph 160M(3)(d) states that:

'subject to subsection (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person.'

24.   Paragraph 160M(3)(d) deems a change in ownership to have occurred by the transaction which gave the purchaser the use and enjoyment of the land for a period at the end of which the title to the land will or may pass to the purchaser.

25.   Subsection 160U(7) makes it clear that the time of acquisition or disposal is to occur when the use and enjoyment of the land is first obtained. Use and enjoyment of the land from a practical point of view takes place at the time the purchaser gets possession of the land or the date the purchaser becomes entitled to the receipt of rents and profits. This will ordinarily occur at the time the contract is made or soon after.

26.   Taxation Ruling TR 94/29: "CGT - Consequences of a contract for the sale of land falling through" at Paragraph 10 states that for CGT purposes, where a terms contract is involved, a change of ownership and hence a disposal and an 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.

27.   The Administrative Appeals Tribunal in Gardiner v Federal Commissioner of Taxation [2000] AATA 257 held that letters of offer and acceptance, in respect of land exchanged between buyer and seller in July 1985, were sufficient to constitute the making of a contract as all material elements of a contract were present.

28.   In reaching this conclusion, the Administrative Appeals Tribunal commented as follows:

"(1) those in which the parties intend to be bound immediately by terms to which they have agreed, but at the same time propose to have those terms restated in a form which will be fuller or more precise, but not different in effect. Here there is a contract binding the parties to perform the agreed terms whether the formal document does or does not come into existence and also binding them to join (if they have so agreed) in settling and signing the formal document;

(2) those in which the parties have finally agreed upon all the terms of the bargain and intend no departure from or addition thereto, but yet have made performance of one or more of the terms conditional upon the execution of a formal document. Here there is a contract which binds the parties to join in bringing the formal contract into existence and then carry it into execution;

(3) those in which the parties do not intend to make a concluded bargain at all unless and until they execute a formal contract. Here there is no enforceable contract. What has been agreed on must be regarded merely as the intended basis for a future contract and not as constituting a contract. Where a 'deposit' is paid in connection with a transaction of this nature the prima facie, but not necessary, inference, is that it is to constitute a deposit upon the making of a contract, but that in the meantime it should not become the property of the intending vendor."

The learned authors of this book go on to say (at page 82):

"Even though there may thus be a binding contract where a further formal agreement is intended, if an offer is made expressly subject to the signing of a formal contract, or if it can be gathered from the terms expressed, or even from the absence of terms necessary to or even usual in a binding contract, that the future document is to contain provisions material to an agreement fairly and fully expressing the intentions of the parties, then it cannot be concluded that the offer, if accepted, is intended by the parties to be the final expression of their agreement. These principles, however, would not ordinarily apply where there is a mere reference to the execution in the future of a formal contract between parties who are otherwise agreed upon the matter that amount in law to the essential element of a concluded bargain. Such a formal contract may be required simply as a record, or even a more detailed record of their agreement, whether for the purpose of satisfying the Statute of Frauds or otherwise.''

Division 149 ITAA 1997

29.   Division 149 of the ITAA 1997 outlines when an asset stops being a pre-CGT asset. Subdivision 149-B of the ITAA 1997 outlines when as asset of a non-public entity stops being a pre-CGT asset. Specifically, subsection 149-30(1) states that:

"The asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985."

30.   Essentially, Division 149 stipulates those entities that have pre-CGT assets must be able to demonstrate that the ultimate owners who had the majority underlying interests in the assets at the acquisition date still have the majority underlying interests in those assets.

APPLICATION TO YOUR CIRCUMSTANCES

Date 1 - DD MM YYYY

31.   The Department wrote to Taxpayer A on DD MM YYYY offering land for sale, at a price of $XYZ for unfilled land, or $ZYX for filled land. The parcel of land to be acquired was identified in the letter, which estimated the area of land to be xy hectares (subject to survey). The letter instructed Taxpayer A that to accept the offer, an option fee of x% of the purchase price was payable. The letter stated that upon payment of the option fee, a licence would be issued for a period of x months, during which time a survey would be carried out.

32.   Taxpayer A wrote to the Department on DD MM YYYY to detail his interest in and acceptance of the option, for approximately xy hectares of unfilled land. There is no record of an option agreement being entered into by the parties, however, the option fee of $xyz was paid by cheque on DD MM YYYY.

33.   While the consideration payable ultimately changed, this was due to the survey of the land identifying that the land was yx hectares rather than xy hectares as originally thought by the parties. The letter indicated that the offer to sell could be accepted by payment of an option fee.

34.   The Department wrote to Taxpayer A on DD MM YYYY confirming that the sale had been approved, and that a short term licence would be issued to enable the survey. It was noted that a deposit of xx% less the option fee would be payable prior to DD MM YYYY. The letter also advised that an agreement for sale commencing DD MM YYYY would be forwarded once the survey was accepted. The purpose of the survey was to confirm the land area, and hence the sales price, as the price was quoted as $xyz per hectare.

35.   The Department forwarded, by letter dated DD MM YYYY, a copy of the survey diagram which indicated that the Department was moving forward to having the survey accepted prior to DD MM YYYY.

36.   Taxpayer A wrote to the Department on DD MM YYYY enclosing plans for the development of the property, also requesting permission to access the land to enable filling prior to the issue of a licence.

37.   The Department wrote to Taxpayer A on DD MM YYYY confirming that the survey had been accepted, that a payback period of 10 years instead of the usual 5 years had been approved, that the plans for development had been approved, and requested payment of a xx% deposit of $XYZ (minus the option fee of $xyz, ie. $XYZ).

38.   The deposit of xx%, less the option fee, totalling $XYZ was paid on DD MM YYYY.

39.   A condition precedent is one which has to have been satisfied prior to an agreement becoming operative as a contract. Due to the need for a survey of the land, it is reasonable to consider that no contract is made for the purposes of subsection 160U(3).

Date 2 - DD MM YYYY

40.   The Department wrote to Taxpayer A on DD MM YYYY informing him that the survey had been delayed, and that a licence was expected to commence on DD MM YYYY. The Department notably in this letter also granted access to the land effective from DD MM YYYY.

41.   The Department granted Taxpayer A access to the land on DD MM YYYY, for the purpose of filling the land for future development by the Taxpayer, consistent with the plans forwarded to the Department on DD MM YYYY.

42.   The effect of this grant of access to the land to Taxpayer A was that Company A had the right to the use and enjoyment of the land, pursuant to a transaction, such as described in paragraph 160M(3)(d) of the ITAA 1997.

43.   Consequently, the land is deemed to have been acquired by the Taxpayer at the time the right to use and enjoyment was obtained, being DD MM YYYY, as per subsection 160U(7) of the ITAA 1997.

44.   This is consistent with the approach adopted by the Commissioner of Taxation in relation to the sale of land by way of a terms contract as per paragraph 10, TR 94/29 CGT: Consequences of a contract for the sale of land falling through.

45.   Specifically, paragraph 160M(3)(d) requires that there be a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period, at the end of which the title to the asset will or may pass.

46.   In relation to the concept of whether title may pass, the AAT has held that there must be a nexus between the possibility of title passing and the totality of the arrangements as per Case 2/93, 93 ATC 107 at 111. It further states that a taxpayer holds one of those assets if they have the use and enjoyment of it under an arrangement (except as a beneficiary under a trust) and, by the time the arrangement ends, they will, or may, start to hold it under the general hold rules or under another special rule.

47.   In this matter, the transaction in relation to the asset was the licence to occupy the property and at the time the licence expired, ownership of the asset was intended to pass to Company A by way of the Agreement for Sale and Purchase.

48.   Further, the approach of the Department in the case of land grants was that a licence was issued first, followed by the Agreement for Sale and Purchase. So, it was not possible for the land to be acquired simply by entering into the Agreement for Sale and Purchase.

49.   Therefore, in determining the totality of the arrangements between the parties, it is evident that title would pass following the expiry of the licence by way of the parties entering into the Agreement for Sale and Purchase.

CONCLUSION

50.   The land held by the XXX FT at XXX was acquired prior to DD MM YYYY.