Private ruling: Pre CGT asset - oral agreement
Date of advice: 3 April 2020
Published: May 2020
Ruling period: Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: 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 pursuant to paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Taxpayer is a relative of Person A. Person A commenced work on a land that was owned by a deceased estate. Person A used the cottage on the land as a principal residence. A few years later, the probate for the deceased estate was granted. Person A acquired the property and the title was transferred to him. In the years prior to 20 September 1985, the taxpayer assisted Person A to clear and develop the property, demolish the timber homestead, construct fencing and refurbish the cottage on weekends and during school holidays. There were a number of old fences on the land. One area described in the application as the taxpayer's block (Subject Property) commencing for the depth of the boundary with the school was bounded by a fence running on the school side of the three dams and the school boundary. The taxpayer moved, finished high school and commenced a trade apprenticeship but during those years, the taxpayer returned during holidays and helped Person A work at the property. Person A stated he would like the taxpayer to acquire the Subject Property when the taxpayer moves back. They also talked about the best location to build a house on the Subject Property. The taxpayer moved back and completed the studies. In a Christmas break prior to 20 September 1985, the taxpayer and Person A had serious discussions in relation to the transfer of the Subject Property. Person A verbally agreed to subdivide the property into separate lots. Person A would transfer the Subject Property in consideration for the work the taxpayer was undertaking, and had undertaken, at the property. Transfer was to take place when permitted by law. (This is referred to as the Oral Agreement). Pending any transfer the subject property was held by Person A for the benefit of the taxpayer. Person A used the Subject Property rent free to run cattle and horses to the extent it was not used by the taxpayer. The taxpayer paid for the removal of trees at the Subject Property. He received grass seed to plant at the Subject Property. He also acquired dairy cattle used for grazing and small scale breeding, kept at the Subject Property. The taxpayer continued to perform unpaid work in the property including: · assisted with the construction of a dwelling · rewired the cottage and some of the sheds · purchased machinery (including a chainsaw) and other equipment · helped with electrical work and provided ongoing support The taxpayer relocated again and moved into the dwelling on the property as a principal residence (this was on the Balance Property). No written agreement was entered into in relation to the subdivision and transfer of any part of the property. At the time, the land cannot be subdivided due to a size restriction. The taxpayer became aware that a number of persons in the area were looking to subdivide and if they all put forward an application, there may be reasonable prospects of success. Person A was not in a financial position to fund the subdivision. So the taxpayer offered to pay (by way of gift) the costs of the subdivision to finalise the Oral Agreement. The taxpayer intended to gift some money for the transfer of the Subject Property to help finance the building of Person A's family home. However, Person A wished to transfer the subject property solely in consideration of the work that the taxpayer performed/was undertaking. An application was made to subdivide the property after 20 September 1985. The taxpayer engaged professionals in relation to this subdivision. Person A passed away intestate, before the subdivision was completed. All of the property formed part of Person A's estate. Subdivision and rezoning were later approved. The titles were issued to Person A's spouse. This created the Balance Property and what is referred to as the Transferred Lot . The Transferred Lot comprised the Subject Property plus an additional area as required for subdivision. A valuation was completed which provided a current market value for the Transferred Lot. Prior to passing away, Person A informed his spouse about the Oral Agreement in relation to the Subject Property. In the course of administration of Person A's estate, Person A's spouse advised the Solicitor assisting her with administration of Person A's estate that the Oral Agreement had been entered into between Person A and the Taxpayer in a pre CGT year. In a letter from the solicitor to a firm of accountants, it described the existence of that Oral Agreement and that Person A's spouse wished to honour the wishes of her late husband. Given the financial situation of Person A's spouse, the taxpayer decided to make a gift of an amount equal to half of the Transferred Lot's market value to assist Person A's spouse. The taxpayer also requested a transfer of the Subject Property (included in the Transferred Lot) to the taxpayer and the taxpayer's spouse. Person A's spouse was advised by her solicitor at the time that the subdivision costs paid by the taxpayer comprised a loan owing by her as the surviving spouse, and was advised that the transfer giving effect to the Oral Agreement should be made for consideration to cancel out the loan. A number of years past 1985, Person A's spouse (as vendor) and the taxpayer and taxpayer's spouse (as joint purchasers) entered into a contract for the sale and purchase of residential land. The property was purchased for half of its market value. The Special Conditions clause provided a reference to what the purchase price was composed of: · the deposit amount was equal to the total amount of fees and costs in rezoning the land and issuing of title deeds incurred by the taxpayer · an amount payable over a number of years in weekly terms with no interest · a final amount payable on completion date A number of years passed and the Taxpayer now wishes to sell the Subject Property to an unrelated party.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-15 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 109-5 | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 Subdivision 110-A

Reasons for decision: Summary: The property is considered to be acquired when the purchasers entered into the written contract with the vendor which was post 20 September 1985. You cannot disregard the capital gains or capital losses on the future sale of the property pursuant to paragraph 104-10(5)(a) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A contract is a legally binding agreement between two parties. An expression of an intention to gift or donate property to another party does not give rise to a contract between the donor and the intended recipient. 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. A number of cases have considered the date when a contract was formed. In Gardiner v FC of T 2000 ATC 2018, 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, the Commissioner's view is that the written contract varies from the purported oral contract in relation to size (acreage) of the property, purchase price, vendor and purchasers so much that it does not reflect the original oral contract. In the oral agreement, Person A promised to transfer the Subject Property to you only for free in consideration for all the work you have rendered on the property. The written contract on the other hand had Person A's spouse as the transferor of a slightly bigger block of land than promised, to you and your spouse. The sale was in consideration of an amount equal to half the current market value of the transferred lot inclusive of the expenses you incurred in the early subdivision of the entire property. Alternatively, the provisions in section 12 (1) of the Property Law Act 1974 states that: All interests in land created by parol and not put in writing and signed by the person so creating the same, or by the person's agent lawfully authorised in writing, shall have, despite any consideration having been given for the same, the force and effect of interests at will only. An application of this state legislation to your circumstances confirms the Commissioner's view that you acquired the property post CGT upon entering a contract for the disposal of property with Person A's spouse, the new owner of the promised block of land. Notwithstanding that Person A's spouse tried to give effect to the oral agreement between you and your late relative, the state law would only recognise an interest created in land through an oral agreement if the transferor of this right was Person A. This is regardless of the consideration paid to purchase the property. | Detailed Reasoning - CGT event A1 - Disposal of a CGT asset: Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2) of the ITAA 1997). Under subsection 104-10(3) of the ITAA 1997, 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. Subsection 109-5(2) of the ITAA 1997 applies a similar rule to determine your time of acquisition. The property is considered to be acquired when you and your spouse entered into the written contract with the vendor which was post 20 September 1985. Accordingly, you cannot disregard the capital gains on the future sale of the property pursuant to paragraph 104-10(5)(a) of the ITAA 1997. | Detailed Reasoning - Matters we have not ruled on: We have not ruled on all of your questions. Here, we list each question that we have not been able to rule on, and explain why. | Detailed Reasoning - Question 2: Was the subject property held on trust on terms that the purchaser was absolutely entitled to the subject property for the purposes of Section 106-50 ITAA 1997? | Detailed Reasoning - Reasons for decision: The Commissioner may decline to make a private ruling if the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter. The Commissioner considers that the correctness of a determination on whether you are an absolutely entitled beneficiary would depend on certain assumptions being made about the constructive trust including that it actually exists and the exact nature of any trust property. The Commissioner is not prepared to make a ruling on the basis of these assumptions. As the correctness of a ruling on this matter would depend on which assumptions were made we are able to refuse to rule as per the Full Federal Court in FCT v Hacon Pty Ltd [2017] FCAFC 181. From your circumstances, it is believed that the Courts have the jurisdiction in making a particular view about whether a constructive trust has been formed at common law. You may apply for another ruling request if that information becomes available. Secondly, it is difficult to see how there could be a trust over part of an asset noting that the asset owned by the relative was the whole property. So, if there was a trust (constructive or otherwise) it would likely have to be over the whole property. The relative would then have beneficial rights over part of the asset owned by the trust preventing either the taxpayer or relative from being able to call for the transfer of the property to them. Consequently, the trust would be the owner, not the taxpayer. There is no practical effect to the relative and the trust would no longer exist to be a rulee. Finally, these matters relate to a period that ended more than 20 years ago. You are not arguing that the trust still exists. | Detailed Reasoning - Review rights when we have declined to make a ruling: We have declined to make your private ruling, and have given you the reasons. This decision may be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (ADJR). The ADJR provides you with two main rights. 1. You can send a written notice to the Commissioner requiring him to provide a written statement of: - the findings of material questions of fact - the evidence these findings were based upon, and - the reasons for his decision. 2. You can apply to the Federal Court of Australia or the Federal Circuit Court for a review of the decision. If you decide to apply to the Federal Court or the Federal Circuit Court for a review of the decision, we suggest you seek professional advice on how to progress. In addition, the Court will be able to provide you with some direction and assistance about the process. An application must be lodged within 28 days of the issue date on your Notice of private ruling . You may lodge your application for review at the Federal Court or Federal Circuit Court in the State or Territory in which you ordinarily reside, or the State or Territory listed in the address for the ATO shown on your Notice of private ruling . You can find more information on the Federal Court website fedcourt.gov.au ,or the Federal Circuit Court fedcircuitcourt.gov.au