Private ruling: CGT (disposal of business and land)
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you considered to have disposed of the business and the land on the date of the contract of sale? | A1: Yes

Relevant facts and circumstances: The vendor entered into a contract for the disposal of a business and a separate contract for disposal of the property that the business was run from, following a successful offer and acceptance for the purchase of the business and property. Both contracts included conditions that the business and the property were being sold as one, and the successful completion of each contract was dependent on the performance and completion of the other. The contract for sale of the business included the following special conditions: · that the buyer must obtain a licence and the bond should then be transferred to the buyer at settlement; · that a due diligence period of 10 working days applied from the date of the contract; · both the vendor and the buyer should be registered for GST prior to settlement; · the business must obtain a health & safety clearance prior to settlement; and · all plant and equipment was to be checked by the buyer five days prior to settlement and to be in working order. Any items that were found not to be working were to be fixed or replaced by the vendor prior to settlement. The contracts for sale were signed by both parties in year ended 30 June 2012 and were both subject to obtaining finance for the purchases. Settlement of the business and the property occurred simultaneously in year ended 30 June 2013.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(1) | Income Tax Assessment Act 1997 Subsection 104-10(3)

Reasons for decision: Summary: The timing of a CGT event is important because it determines the income year in which you report your capital gain. 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. Subsection 104-10(3) of the ITAA 1997 sets the time of CGT event A1 as: (a) when you enter into the contract for the disposal; or (b) if there is no contract - when the change of ownership occurs. If a contract is subject to a condition, it does not affect the time of the making of the contract unless it is a condition precedent to the formation of the contract (Taxation Determination TD 94/89). Contracts subject to a condition precedent to the formation of a contract are not binding until that condition is met. Therefore, a contract for the purposes of CGT event A1, would not come into existence prior to the condition being met. The differences between conditions precedent to the formation of a contract and conditions precedent to the performance of a contract were discussed in the case Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 511 where Mason J observed that: There is an obvious difference between the condition which is precedent to the formation or existence of a contract and the condition which is precedent to the obligation of a party to perform his part of the contract and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment. In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled. In the second category there is a binding contract which creates rights capable of enforcement, though the obligation of the party, or perhaps of both parties, to perform depends on fulfilment of the condition and non-fulfilment entitles him to terminate. And later at 552: Generally speaking the court will tend to favour that construction which leads to the conclusion that a particular stipulation is a condition precedent to performance as against that which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract. In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens. Instead, it is appropriate in conformity with the mutual intention of the parties to say that there is a binding contract which makes the stipulated event a condition precedent to the duty of one party, or perhaps of both parties, to perform. Furthermore, it gives the courts greater scope in determining and adjusting the rights of the parties. For these reasons the condition will not be construed as a condition precedent to the formation of a contract unless the contract read as a whole plainly compels this conclusion. In Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153, the contract for the sale of land was expressed to be "subject to and conditional upon the approval of the Beaudesert Shire Council to a plan of subdivision... within six (6) calendar months". It was further provided that if such approval was not obtained the purchaser would be entitled to cancel the contract. It was held that the approval was expressed as a condition precedent to the obligation to complete the contract, not as a condition precedent to the formation of the contract. Similarly, in this case the vendor entered into contracts for the sale of the business and property during the 2011-12 income year. The contracts were subject to the special conditions set out in the relevant facts and circumstances above. The special conditions outlined above did not prevent the formation of the contracts. We consider that these special conditions were conditions precedent to the performance of the contracts, and gave rise to the right for both parties to terminate the contract if they were not fulfilled. The special conditions were not conditions precedent to the formation of the contracts. The non-fulfilment of the special conditions, just like the purchaser's non-compliance with the finance clause, would merely have allowed either the vendor or the purchaser to terminate the contracts prior to settlement. Accordingly, CGT event A1 occurred for the sale of the business and the property on the date of the contracts.