Private ruling: Pre-CGT v. post-CGT
Date of advice: 20 November 2017
Published: April 2018
Ruling period: Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will any capital gain or loss you make on the disposal of the property be disregarded paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You and your partner attended an auction and applied to purchase land and paid the first purchase instalment. You do not have a copy of the contract that was entered into at the auction, however after the auction you were provided a License to occupy town or suburban lands (the license) which was issued under section 38 of the Land Act 1933 . The licence refers to the fact that you have applied to purchase the property and that you have paid the first instalment amount. The license provided you with the right to enter the land prior to title being transferred to you. The license contained conditions that were required to be met before you and your partner could apply for Freehold title to the land to be transferred to you, including the payment of the balance of the purchase money. You applied for a building permit which included floor plan of the dwelling you were going to place on the land. This was approved by the relevant local authority. You advise that you installed a second-hand dwelling on the land within one month of the building permit being approved, prior to 20 September 1985. The Acting Secretary for Lands sent a letter to the relevant local authority advising the licensees of the lot have requested the issue of freehold title for the land and seeking confirmation that the residence has been erected to “top plate height” stage and is not less than 50% completed, in compliance with your council’s by-laws and regulations. The relevant local authority responded to the Secretary for Lands letter advising the second hand dwelling had been positioned on the lot however did not comply with the shire by-laws and regulations. You have advised that the licence did not become void after receiving the response from the relevant local authority. You also advise that no extension date was provided to you either written or verbally. As the shire by-laws and regulations were not met, the freehold title for the land transfer was delayed until the dwelling satisfied these shire by-laws and regulations. You began alterations of the dwelling to meet the shires by-laws and regulations. The alterations were not completed until after 20 September 1985. Title to the property was transferred to you and your partner as joint tenants after 20 September 1985. As a part of as family court order you later became the sole owner of the property after you separated from your partner. The property is not your main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 108-55(2) | Income Tax Assessment Act 1997 subsection 109-5 | Land Act 1933 section 38

Reasons for decision: Summary: Capital gains tax (CGT) event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)), such as when an asset is transferred from entity to another by way of sale or gift. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. The general rules for the acquisition of CGT assets are contained in section 109-5 of the ITAA 1997. The table in subsection 109-5(2) of the ITAA 1997 specifically states that where an entity disposes of a CGT asset to you, you acquire it when the disposal contract is entered into or, if none, when the entity stops being the asset's owner. The time when a contract is entered into is the time when it comes into existence for general law purposes. The timing may also depend on the terms and conditions of the contract and any relevant legislation. If a contract is subject to a condition, an issue arises as to whether the condition is a condition precedent to the formation of the contract or whether it is a condition precedent to performance of the contract. In the first case, the contract does not come into existence until the condition is met. In the second case, the condition does not prevent the creation of the contract – non-fulfilment of the condition merely entitles a party to terminate the contract (see Perri v. Coolangatta Investments Pty Ltd (1982) 149 CLR 537) ( Perri ). The nature of a condition (that is whether it is a condition precedent to the formation of a contract) depends on the proper construction of the terms of the contract. However, as pointed out by Mason J in Perri , generally speaking a court will tend to favour a construction which leads to the conclusion that a particular stipulation is a condition precedent to performance (as against a construction which leads to the conclusion that the stipulation is a condition precedent to the formation or existence of a contract). Building separate asset from land In certain circumstances, a building can be taken to be a separate CGT asset from land. If you acquired land prior to 20 September 1985, under subsection 108-55(2) of the ITAA 1997 any building constructed on that land will be taken to be a separate CGT asset from the land if: ● you entered into a contract for the construction on or after that day; or ● if there is no contract – the construction started on or after that day. Marriage breakdown rollover Section 126-5 of the ITAA 1997 provides a roll over for a CGT event involving a marriage or relationship breakdown. If the rollover applies, the spouse acquiring the asset (transferee) is taken to have acquired it prior to 20 September 1985 if the transferor acquired it before that date (paragraph 126-5(6) of the ITAA 1997). The roll over consequences in section 126-5 of the ITAA 1997 apply if the 'trigger event' involves an individual and their spouse or former spouse and occurs because of: ● a court order under the Family Law Act 1975 or under a state or territory law, or foreign law relating to breakdowns of relationships between spouses | Detailed Reasoning - Application to your circumstances: In your case, you were issued with the license prior to 20 September 1985. The license indicates that you had already entered into a contract to purchase the property from the Crown. You were issued the licence in accordance with section 38 of The Land Act 1933 which specifies; (2) Land referred to in subsection (1) may be put up for sale at such times and places as the Minister thinks fit, and the Minister may withdraw from sale any lot referred to in that subsection at any time prior to that lot being actually offered for sale bid for. Despite the fact that title was not transferred to you until the conditions stated on the licence were satisfied, we accept that you entered into a contract to purchase the land on the date of the auction. The Commissioner accepts that this occurred prior to 20 September 1985. The conditions stated on the licence were conditions precedent to the performance of the contract; as opposed to conditions precedent to the formation of the contract. Additionally, we accept that the construction of the dwelling commenced prior to 20 September 1985; subsection 108-55(2) of the ITAA 1997 will therefore not apply to treat the dwelling as a separate CGT asset to the land. You acquired your partner’s share of the property after 20 September 1985, however as it was as a result of a family court order, the marriage and relationship breakdown rollover under section 126-5 of the ITAA 1997 will apply. Therefore, it is considered that your land and dwelling are a pre-CGT asset and any capital gain or loss you make on its disposal will be disregarded under the exception in paragraph 104-10(5)(a) of the ITAA 1997.