ATO Interpretative Decision
ATO ID 2002/911
CoE CGT
Capital gains: partners contribute property to the partnership capitalFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does any CGT event in Division 104 of the Income Tax Assessment Act 1997 ('ITAA 1997') happen when a taxpayer contributes their interest in a block of land to the capital of a partnership?
Decision
Yes. When the taxpayer contributes their interest in a block of land to the capital of a partnership, CGT event A1 in section 104-10 of the ITAA 1997 happens.
Facts
The taxpayer and another individual acquired a block of land after 20 September 1985.
Several months after acquiring the property, the taxpayer entered into a partnership with the other joint owner of the property and two other individuals.
The partnership was entered into for the purpose of subdividing, developing and selling the property as separate individual lots.
The other two individuals each contributed an amount towards the original acquisition cost of the property.
Reasons for Decision
For CGT purposes, each partner in a partnership has a separate interest in each CGT asset of the partnership: subsection 106-5(2) of the ITAA 1997. Accordingly, upon formation of the partnership, the taxpayer and the other joint owner dispose of part of their interest in the property to the new partners.
CGT event A1 (section 104-10 of the ITAA 1997) will happen to that part of the taxpayer's interest in the land that was disposed of at the time of entering into the partnership. Under subsection 104-10(4) of the ITAA 1997 the taxpayer will make a capital gain if the capital proceeds are more the asset's cost base. The taxpayer will make a capital loss if the capital proceeds are less than the asset's reduced cost base.
The capital proceeds from the CGT event (subsection 116-20(1) of the ITAA 1997) will equal that part of the amount which the taxpayer received from the joining partners in relation to the acquisition of their interest in the land. As the CGT event only happens to part of the interest in the property, the cost base will have to be apportioned according to the following formula in subsection 112-30(3) of the ITAA 1997:
Cost base of the asset * (Capital proceeds for the CGT event happening to the part / Those capital proceeds plus the market of the remainder of the asset)
The reduced cost base of the interests disposed of on formation of the partnership is worked out similarly.
Date of decision: 27 August 2002Year of income: Year ended 30 June 2001 Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 104-10
subsection 104-10(4)
subsection 106-5(2)
subsection 112-30(3)
subsection 116-20(1)
Related Public Rulings (including Determinations)
Taxation Ruling IT 2540
Keywords
Capital gains tax
Partnerships
ISSN: 1445-2782
| Date: | Version: | |
| You are here → | 27 August 2002 | Original statement |
| 12 March 2010 | Archived |