Edited version of private ruling

Authorisation Number: 1011411603189

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Ruling

Subject: CGT - Subdivision of land

Question and answer

Is there a CGT event when the title of a property is changed as a result of the subdivision into two identical lots?

Yes

This ruling applies for the following period/s:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse and another couple purchased a block of land after 20 September 1985. Each couple owned a one half share in the block of land as tenants in common.

Later two identical units were constructed on the land as a semi detached duplex structure sharing a common wall.

Each couple has always occupied one of the two units as their main residence and considered their respective unit and surrounding land to be their own.

There is a divider between the two lots.

The land will be subdivided into two lots, Lot A and Lot B. The lots will be identical in size. A valuation of the proposed two lots was conducted by a qualified valuer and both lots are of equal value.

After subdivision, there will be no change in the area of the unit and surrounding land used by each couple. Each couple will continue to occupy their respective unit as their main residence.

The subdivision will result in the change of the names on the title. The title of Lot A will be in the name of you and your spouse. The title of Lot B will be in the other couple's name.

Both couples have agreed to the subdivision taking place so that each couple will legally own their unit and surrounding land outright. Plans for the subdivision have been in place since the units were constructed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-7.

Income Tax Assessment Act 1997 Section 118-110.

Reasons for decision

You can make a capital gain or capital loss if a CGT event happens to a CGT asset in which you have an ownership interest (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

A CGT asset is any kind of property, or a legal or equitable right that is not property, real estate is a CGT asset.

CGT event A1 happens if you dispose of your ownership interest in a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity.

When considering the disposal of an asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset.

In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title. In your case, the property in question is currently owned by you and your spouse (one couple) and another couple in half shares as tenants in common. It is proposed the property will be subdivided into two lots. Lot A will be in the name of you and your spouse. Lot B will be in the other couple's name.

Since purchasing the land, you and your spouse have treated what will become Lot A as your own and the other couple have done likewise with what will become Lot B.

You and your spouse argue that you have enjoyed exclusive possession of the proposed Lot A to this point and that the proposed subdivision 'regularises' this occupation. You consider that Taxation Determination TD 92/148 is not applicable to your circumstances as it relates to joint tenancy whereas in your case each couple has a half share as tenants in common and have by arrangement exclusive occupation of your respective halves.

Nature of a tenancy in common

Section 108-7 of the ITAA 1997 provides that individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

At common law, tenants in common have an undivided proportionate or fractional interest in property, possessing the property in common and without exclusive possession of any part of it. They have a distinct or separate interest in the property, but that interest is not physically identifiable. In other words, a tenant in common cannot point to a particular part of the property as being theirs. The textbook Butt, Peter 2006, Land Law, 5th edition, Lawbook Co, Pyrmont, N.S.W. : at pages 213-214 considers the legal nature of a tenancy in common.

In your case, you and your spouse have a distinct one-half share (your CGT asset) in the whole property that you and the other couple together purchased on date X. Likewise the other couple has a one-half share (their CGT asset) in the whole property. However, those two shares are, as noted previously, undivided or not physically identifiable: it is therefore incorrect to treat (the now) Lot A as belonging to you and your spouse, and it is equally incorrect to treat Lot B as belonging to the other couple. This legal outcome remains, notwithstanding that you and your spouse have until now treated Lot A as your own and made improvements upon it whilst the other couple has done the same with regard to Lot B.

Whilst we appreciate your particular circumstances, there is nothing in the Income Tax Assessment Act 1997 that displaces the common law notion of a tenancy in common.

Case Law

A case with some similarities but involving a jointly held parcel of shares is Johnson v. FC of T 2007 ATC 2161. Although dealing with shares, it was held in that case that having a one half interest in a parcel of shares did not equate to having exclusive ownership of one half of the total number of shares. The taxpayer submitted that, notwithstanding that the shares were registered in joint names, he and his brother always understood that they each held 50% of the shares; the transfer into individual names merely gave effect to the underlying reality and did not amount to a disposal. The mother also gave evidence that it was her intention that each son would take half the number of shares. This situation is similar to your case in which the two couples always had an understanding that their unit and surrounding land belonged to them exclusively.

CGT Outcome

The CGT outcome in your case parallels that in TD 92/148 which as noted deals with a joint tenancy situation. Upon the subdivision, you and your spouse will dispose of your 50 per cent share in Lot B to the other couple, thereby triggering CGT event A1 as there will be a change of ownership - in both beneficial and legal terms - of that 50 per cent share in Lot B. In a concurrent and separate transaction, you and your spouse will acquire a 50 per cent share in Lot A, namely the share in Lot A that was previously owned by the other couple. The converse applies in the case of the other couple; it will dispose of a 50 per cent share in Lot A to you and your spouse (again triggering CGT event A1), and will concurrently and separately acquire a 50 per cent share in Lot B from you and your spouse.

A similar decision was made by the judge in Johnson's case which concluded that no CGT rollover relief was available. The following reasoning was used:

Section 108-7 of the ITAA 1997 provided that individuals who held a CGT asset as joint tenants were treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset. In this case, each share was comprised of two assets, one held by each brother. Dividing the parcel in two for the purposes of a transfer to each joint owner effectively required those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they were acquiring. As a result, the rearrangement and reallocation of the jointly-owned shares constituted a disposal of CGT assets under CGT event A1 and tax was levied on the capital proceeds (ie the market value of the interest acquired in the shares) less the cost base. This is consistent with the Commissioner's view in Taxation Determination TD 92/148.

Main residence exemption

Taxation Ruling IT 2485 states that where a dwelling is not the sole or principal residence of all joint owners, the exemption provided on disposal (main residence exemption) is available only to the joint owner or each joint owner who occupied the dwelling as his or her sole or principal residence in respect of his or her share in the dwelling. As such, you and your spouse will not be entitled to disregard any capital gain or capital loss you make on the transfer of your ownership interest in the property that contains the main residence of the other couple.

Note: The comparable result in this case, as compared with that of the joint tenant in TD 92/148, arises because both joint tenants and tenants in common have an undivided interest in the whole of the property concerned. The difference between the two forms of co-ownership is that tenants in common have a distinct or separate share in the property that cannot be physically identified (as noted), whereas joint tenants do not have such a separate share in the property. Instead joint tenants jointly own the whole of the property in question. In any event, joint tenants are regarded as tenants in common for income tax purposes: section 108-7 of the ITAA 1997.

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