Issue
When your transfer of an asset fulfils obligations that were imposed on another person under a contract to which you were not a party, can CGT event A1 happen to you at the contact time under paragraph 104-10(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The term 'contract for the disposal' of a CGT asset in paragraph 104-10(3)(a) of the ITAA 1997 refers to a contract that is the source of the obligation to make a specific disposal. You do not have to be a party to the contract to satisfy this requirement.
Facts
A body corporate for a strata title unit block owned one of the units.
The members of the body corporate, in their individual capacities, entered into a contract with a third party. One of the obligations imposed on the members under the contract was to secure the transfer of that unit to the third party for a particular price.
The members exercised the voting powers attaching to their interests in the body corporate to direct the body corporate to transfer the unit.
The body corporate transferred the unit to the third party in accordance with these directions. As a result, CGT event A1 in section 104-10 of the ITAA 1997 happens to the body corporate.
The question is whether that event happens to the body corporate at the contract time, even though the body corporate was not a party to the contract.
Reasons for Decision
CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose of an asset, that is, if a change of ownership of the asset occurs from you to another entity (subsections 104-10(1) and 104-10(2) of the ITAA 1997).
The event happens when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997). A 'contract for the disposal' is one which is the source of the obligation to make a specific disposal. On the facts of this case, the contract between the members of the body corporate and the third party satisfies this requirement.
The question is, how does the timing rule in subsection 104-10(3) of the ITAA 1997 apply where there is a contract for the disposal, but the entity to which CGT event A1 happens to is not a party to that contract?
While CGT event A1 clearly happens in these circumstances, and it happens pursuant to the disposal contract, the ordinary meaning of the words in subsection 104-10(3) of the ITAA 1997 could be read so that there is no 'time' at which the event happens. That is, because there is a disposal contract, the event does not happen under paragraph 104-10(3)(b) of the ITAA 1997 at the transfer time, but because the transferor is not a party to the disposal contract, the event also doesn't happen at the contract time under paragraph 104-10(3)(a) of the ITAA 1997.
This result would clearly be unintended. The calculation of a net capital gain or loss for an income year, the application of the CGT discount and market value substitutions for the first element of cost base and for capital proceeds all depend upon identifying the time of the relevant CGT event.
Section 1-3 of the ITAA 1997 and principles of statutory interpretation are relevant to the interpretation of subsection 104-10(3) of the ITAA 1997. Section 1-3 of the ITAA 1997 says that if the Income Tax Assessment Act 1936 (ITAA 1936) expressed an idea in a particular form of words, and the ITAA 1997 appears to have expressed the same idea in a different form of words, the ideas are not taken to be different just because different forms of words are used.
Subsection 160U(3) of the ITAA 1936 and paragraph 104-10(3)(a) of the ITAA 1997 are both about the idea of when a disposal (or CGT event A1) happens when it is effected under a contract. The similar words 'under a contract' in subsection 160U(3) of the ITAA 1936 were interpreted by the Full Federal Court in Kiwi Brands Pty Ltd v. Federal Commissioner of Taxation (1998) FCR 64; 99 ATC 4001; (1998) 40 ATR 477 as including a case where you disposed of or acquired an asset under a contract to which you were not a party. There is no indication that the Parliament, in enacting subsection 104-10(3) of the ITAA 1997, intended to express a different idea.
Therefore, the words of subsection 104-10(3) of the ITAA 1997 should be interpreted so that the time of CGT event A1 for a disposal that is effected under a contract of disposal to which the seller was not a party is the time of that contract. If necessary, this result is achieved by reading paragraph 104-10(3)(a) of the ITAA 1997 as if the words 'or another entity' (or words having a similar effect) had been included after the word 'you' ( Bermingham v. Corrective Services Commission of New South Wales (1998) 15 NSWLR 292).