Edited version of private advice

Authorisation Number: 1052187157311

Date of advice: 15 November 2023

Ruling

Subject: CGT - disposal of asset

Question

Did the timing of the disposal of your shares in the Company occur on the later of the date of execution of the Share Sale and Purchase Agreement by all parties or, the date upon which Agreement A was executed by all relevant parties, pursuant to subsection 104-10(3) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 20XX

Year ended 30 June 20YY

The scheme commences on

Date in year ended 30 June 20XX

Relevant facts and circumstances

1.    On a date in the year ended 30 June 20XX, the Applicants, along with other minority shareholders, executed a Share Sale and Purchase Agreement (the SSPA) to sell their respective proportions of the shares in the Company to the Buyer. The SSPA forms part of and should be read with this description of the facts.

2.    A clause of the SSPA contained a number of Conditions Precedent, including the entering into of a number of agreements involving third parties.

3.    An Interconditional Agreements clause of the SSPA provides that the SSPA and the other agreements are interdependent and conditional on each other. It also provides that:

...despite anything in this document, this document shall be of no effect until [Agreement A] is executed by all relevant parties.

4.    Completion of the SSPA (being defined as completion of the sale and purchase of the shares) is conditional on the satisfaction or waiver of the Conditions Precedent.

5.    The parties must use reasonable endeavours to ensure the Conditions Precedent are satisfied.

6.    The party entitled to the benefit of the Condition Precedent may waive the condition with certain approvals.

7.    If any Condition Precedent is not satisfied or waived by the Conditions Precedent End Date, or is incapable of being satisfied, then the SSPA may be terminated by either party (provided there is no unremedied breach by either party of the Conditions Precedent).

8.    The Conditions Precedent End Date is a date in the year ended 30 June 20YY.

9.    The Applicants satisfied their Conditions Precedent shortly after signing the SSPA.

10.  All of the Conditions Precedent were ultimately satisfied and completion under the SSPA occurred in the year ended 30 June 20YY.

Reasons For Decision

Question 1

Did the timing of the disposal of your shares in the Company occur on the later of the date of execution of the Share Sale and Purchase Agreement by all parties or, the date upon which Agreement A was executed by all relevant parties, pursuant to subsection 104-10(3) of the ITAA 1997?

Summary

Yes. The time of the disposal of your shares in the Company occurred on the later of the date of execution of the Share Sale and Purchase Agreement by all parties or, the date upon which Agreement A was executed by all relevant parties, pursuant to subsection 104-10(3) of the ITAA 1997.

Detailed reasoning

1.    Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset and that the gain or loss is made at the time of the event.

2.    Shares are a CGT asset: section 108-5 of the ITAA 1997.

3.    Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs, whether because of some act or event or by operation of law: subsection 104-10(2).

4.    Subsection 104-10(3) of the ITAA 1997 relevantly provides:

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.

Example:

In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.

The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).

Note 1:

If the contract falls through before completion, this event does not happen because no change in ownership occurs.

...

5.    Taxation Determination TD 2002/4 Income tax: capital gains: what is the first element of the cost base and reduced cost base of a share in a company you acquire in exchange for a share in another company in a takeover or merger? at paragraph 5 states that it is important to understand the nature and effect of particular conditions in a contract:

5. ...There is a clear difference between a condition which is precedent to the formation or existence of a contract (referred to in this Taxation Determination as a 'condition precedent to formation of a contract') and a condition which is precedent to the obligation of a party to perform their part of the contract (referred to in this Taxation Determination as a 'condition precedent to performance of a contract'). In the former 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 one or both parties to terminate the contract.

...

8. The status of a particular condition depends on the intention of the parties to the contract as expressed in their contract...

6.    Similarly, in ATO Interpretative Decision ATO ID 2004/668 Income tax Capital gains tax: buy-sell agreement - time of CGT event A1, the Commissioner states:

The time when a contract is entered into is the time when it comes into existence for general law purposes.

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, 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.

7.    The preference of the courts is to construe a contract as containing conditions precedent to performance, as opposed to formation: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552; 41 ALR 441 at 451 (Perri) per Mason J (although dissenting in the ultimate conclusion):

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. 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. [emphasis added]

8.    In our view, it is likely that if a contract can progress or obligations under the contract can be enforced without a condition being satisfied, the contract is already in existence and is valid and binding on the parties. It will follow that the condition is a condition precedent to performance of some obligations under the contract, as opposed to the contract's formation. The condition discussed in Perri, which was held to be a condition precedent to the performance of the contract, was a condition that the parties could waive.

Application to your circumstances

9.    Generally, the terms of the Conditions Precedent clause support the conclusion that the Conditions Precedent are conditions precedent to performance of the obligations of the parties to complete the transaction under the SSPA and not to formation of the contract. The language of the opening words is that Completion (being defined as completion of the sale and purchase of the shares) is conditional on the satisfaction of the Conditions Precedent.

10.  Subclause X of the Contract requires each Seller and the Buyer to use reasonable endeavours to satisfy the Conditions Precedent.

11.  Subclause Y permits a Condition Precedent to be waived in writing by the party entitled to its benefit provided that they have certain approvals. The ability of the party for whose benefit the condition is included to waive the conditions under the SSPA suggests that the proper construction of the Conditions Precedent clause of the SSPA is as conditions precedent to performance of the obligation to complete under the SSPA.

12.  Further, if any Condition Precedent is not satisfied or waived by the Conditions Precedent End Date, or is incapable of being satisfied, then the SSPA may be terminated by either party.

13.  These clauses support that from the date the SSPA is executed binding obligations are created between the parties that may be terminated.

14.  However, the words of the Interconditional Agreements clause supports the conclusion that one of the Conditions Precedent, is a condition precedent to formation of a binding contract. This clause states that "despite anything else in this document, this document shall be of no effect until Agreement A is executed by all relevant parties".

15.  In our view, the fact that this particular condition is singled out and it is expressly stated that the document (being the SSPA) will be "of no effect" "despite anything else" in the document are clear indications that it was the intention of the parties that the execution of Agreement A was required to happen before a binding contract would exist.

16.  The other Conditions Precedent are conditions precedent to performance of the contractual obligations to complete the transaction. Their inclusion does not prevent a binding contract from coming into existence but enables either party to terminate the contract if the conditions are not satisfied.

Conclusion

17.  Case law supports that a 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.

18.  When the SSPA is viewed as a whole, the wording of the Interconditional Agreements clause compels the conclusion that execution of Agreement A is a condition precedent to formation of the contract.

19.  The remaining Conditions Precedent are conditions subsequent to formation of the contract but precedent to performance of the obligations on either party to complete the transaction. The terms of the SSPA, having particular regard to terms of the Conditions Precedent clause, do not support a conclusion that these conditions need to be met before the formation of a contract between the parties.

20.  Therefore, in our view, CGT Event A1 would occur on the date that the SSPA was executed by all relevant parties or the date that Agreement A was executed by all relevant parties whatever was the later.

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