Private ruling: Capital gains tax
Date of advice: 10 June 2016
Published: July 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Did CGT event A1 occur in respect of the disposal of shares on the date on which the conditions precedent in the agreement were satisfied, in accordance with section 104-10 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • the application for a private ruling; • the documents provided with the application for a private ruling; • the share sale agreement between the parties. The parties entered into a share sale agreement. As part of the agreement, you agreed to sell all the shares in Company A subject to the satisfaction of certain conditions precedent listed in the agreement. The agreement states that nothing in it will cause a binding agreement for the transfer of shares or the sale of assets to arise unless and until the conditions precedent have been satisfied. The conditions precedent was subsequently satisfied.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 104-10

Reasons for decision: Summary: Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 happens on the disposal of a CGT asset. A CGT asset is disposed of if there is a change in its ownership from one entity to another. Subsection 104-10(3) of the ITAA provides that CGT event A1 happens when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs. The CGT provisions take the general law as it stands and this means the date you enter the contract must be the date the contract comes into existence for general law purposes. A contract generally comes into existence at the time an offer is accepted, however different rules may apply in some circumstances. If a contract is subject to a condition, an issue arises whether the condition is a condition precedent to its formation or whether it is a condition precedent to performance of the contract. In the first case, non-fulfilment of the condition prevents a binding contract from coming into existence. No contractual rights enforceable by the parties are created unless and until the condition is fulfilled. In the latter case, a binding contract exists which creates rights capable of enforcement, though the obligation of a party to the contract (or perhaps of both parties) to perform their part of the contract depends on fulfilment of the condition. Non-fulfilment of the condition entitles on or both parties to terminate the contract. The status of a particular condition depends on the intention of the parties to the contract as expressed in their contract. For example, if a Deed was signed by all parties involved, however a particular clause of the Deed provides that the Deed will not bind the parties unless and until all the conditions precedent was satisfied. This clearly would establish that the parties do not intend for the Deed to become an enforceable contract until the nominated events actually occurred and their intention were not to be bound by it from the date it was signed. That is, it was a condition precedent to the formation of the Deed. Accordingly, no agreement will be entered into for the purposes of CGT event A1 until all the conditions precedent are met. | Detailed Reasoning - Application to your circumstances: In this case, the agreement clearly states that a binding agreement for the transfer of shares will not arise until the conditions precedent been satisfied or waived. Accordingly, it is considered that the agreement comprised two separate contracts: • a contract comprising the conditions precedent and other obligations preliminary to the sale, and • a separate contract comprising the sale and purchase obligations which was subject to the conditions precedent. The former contract is clearly the relevant contract for the disposal of the shares. This contract did not come into existence until the conditions set out in the first contract were met on a particular date. Accordingly, CGT event A1 was triggered on that date.