Issue
Does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen upon the termination of an agreement which the taxpayer entered into to cart product for another party?
Decision
Yes, CGT event C2 in section 104-25 of the ITAA 1997 happens upon the termination of an agreement which the taxpayer entered into to cart product for another party.
Facts
The taxpayer entered into an oral cartage agreement with another party. On entering into this agreement the taxpayer acquired the right to cart the other party's products. The agreement represented the whole business carried on by the taxpayer.
After several years the agreement was terminated and an amount was paid for the cancellation of the agreement. On accepting the payment the taxpayer lost their rights under the agreement. The taxpayer was put out of business by the cancellation of the agreement.
The taxpayer signed a Deed of Release when they received the payment. The Deed of Release provided that the payment was '...in full and final satisfaction of all suits, claims and/or demands whatsoever which [the taxpayer] now have or may hereafter have in or arising out of any arrangements under which [the taxpayer] carted product for [the other party]...'.
Reasons for Decision
On entering into the agreement with the other party, the taxpayer acquired legal or equitable rights, for example, the right to enforce the resulting contractual obligations. The agreement was therefore a CGT asset under section 108-5 of the ITAA 1997.
CGT event C2 in section 104-25 of the ITAA 1997 happens if your ownership of an intangible CGT asset ends in certain ways. The taxpayer's CGT asset (their rights under the agreement) was an intangible asset and the taxpayer's ownership of that asset ended by the asset being released or cancelled when the taxpayer entered into the Deed of Release. Accordingly, CGT event C2 happens under subsection 104-25(1) of the ITAA 1997.
The capital proceeds from the CGT event happening is the amount received for the termination of the agreement. A capital gain will arise if those proceeds are greater than the right's cost base.