CGT: Acquisition of CGT asset - satisfaction of rights to have asset transferred to purchaser

Does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the taxpayer's contractual rights for the purchase of the asset are satisfied by the actual transfer of ownership of the asset?

No. CGT event C2 in section 104-25 of the ITAA 1997 does not happen when the contractual rights for the purchase of the asset are satisfied by the completion of the transfer of ownership of the asset to the purchaser. It is considered that the real transaction is the acquisition of the underlying CGT asset rather than the ending of the rights which merely facilitate the acquisition.

The taxpayer company entered into a contract for the purchase of real estate. The contract provided for settlement to occur six months from the date of entering into the contract. The contract price was for a fixed sum, payable 10% as a deposit and the balance on settlement. The contract was settled on the specified date. During the time between entering and completing the contract the market value of the property increased by $40,000.

The UK case of Zim Properties Ltd v. Proctor (H M Inspector of Taxes) (1985) STC 90; 58 TC 371 ( Zim Properties Case ) concerned damages received by a vendor against a solicitor for negligence, where the buyer rescinded the contract of sale upon the failure of the vendor's solicitor to demonstrate good title to the property. The court took the approach that it was necessary to determine whether the damages were received in respect of the underlying property or the right to sue arising on the solicitor's default.

The decision in the Zim Properties Case is relevant to the Australian CGT provisions in that many transactions can be broken down into several sub-transactions, each of which might independently attract the operation of those provisions. In such situations, it is relevant for the Commissioner to consider what the real transaction is.

An executory contract for the transfer of a CGT asset is, by definition, itself a CGT asset. The subsequent performance of the contract discharges and satisfies the contractual rights and on the face of it may cause a CGT event C2 to happen.

However, in such circumstances, the real transaction is the acquisition of the underlying CGT asset (the property) rather than the ending of the rights that merely facilitate that acquisition. This approach is consistent with the view expressed in Taxation Ruling 95/35 regarding compensation receipts and identifying the relevant asset for the purposes of the CGT provisions.

In determining what the most relevant asset or transaction is, it is often appropriate to adopt a 'look-through' approach to the transaction or arrangement.

Accordingly, where the change of ownership of a CGT asset occurs under a contract, the CGT provisions of the ITAA 1997 will apply only to the acquisition of the underlying asset and not to the rights that merely facilitate the transaction.

Note: This ATO Interpretive Decision does not address the situation where the purchaser deals with the contractual rights other than by simply completing the purchase in accordance with the contract, for example, by assigning the contractual right to have the property conveyed. Such dealings are likely to be CGT events.