Edited version of private ruling

Authorisation Number: 1011567619086

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Ruling

Subject: Subdivision

Will a capital gains tax (CGT) event occur when jointly owned land is subdivided and transferred into the names of parties separately, who jointly owned the original parcel of land?

Yes.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own XXX acres of land and jointly own an adjoining property of XX acres with other couples.

You inquired at the Shire Council about subdividing the jointly own XX acre land into XX acre lots so that each couple would own their own parcel of land. You were advised by Council they would not approve the subdivision at the time, but you could apply at a later time.

You employed a surveyor to survey the XX acres for separation. You had him divide the land into separate sections. You made an agreement between the couples as to which couple would own each block. You chose the value of the sections and decided who had which area.

You had the XX acres valued by a real estate agent. You drew up an agreement between yourselves, signing it and agreeing to do it this way and get it subdivided officially at a later date.

You separated the sections with fences at the survey pegs and shared the cost of that, then operated the sections separately.

Over the years you have developed the sections separately at your own expense. There are no houses on the property, the land has been used for hobby farming.

You have tested the waters regularly with the Shire to see if they would support subdivision, each time it is the same thing, they will only support smaller lots.

Your neighbour who had XX acres, sold out to a subdivider who is in the process of having that land subdivided into X acre lots.

Because of all the above you have decided to subdivide into X acre lots and have been working with the Shire and the Planning Commission for rezoning, and subdivision. This process has been on going for the past two years.

The title of the land will change from the original couples to the same couples, but held separately, having the title on the agreed number of XX acre lots each.

Because of the huge expense involved in subdividing you will probably have to sell some of the lots to finance the subdivision, but your intention is to keep as many of the blocks as financially possible in your separate names.

You will have to realign your original boundary fences to accommodate the roads as part of the subdivision. This should only be a slight alteration to your individual areas of land. After the subdivision the couples will hold title to their own XX acre area as was their intention when they entered into the agreement.

You plan to manage the project, in conjunction with Town Planning consultant and others that you will need to bring in from time to time. Most of the activities will be carried out by contractors. You hope to be personally involved in the subdivision to the extent of your abilities.

You plan to do the subdivision in stages, hopefully by doing so you will minimize borrowings. You believe you will need to borrow approximately $X to get started.

The expected costs of the activity will depend on quite a number of requirements and the way things are done, and the length of time frame forced on you by red tape. You have been quoted between $X and $X per lot, because of the above variance. The total proceeds from the subdivision will be $X to $X per lot but will only be for the lots sold.

In regards to the XX acres, you have no desire to sell any of the lots, but to subdivide them into the different family names and keep them.

You will have to sell some lots to be able to proceed with the staged development. The same will apply to the XXX acre lot also belonging to you. As part of the project you will subdivide this land into XX lots. You will sell enough lots to finance the project, as you go stage by stage.

You have no intention of any future subdivision at this stage, as this subdivision will keep you busy for a long while.

None of the families or related entities, have ever completed a subdivision or been in business of land development.

You have no plans to subdivide any other property you own.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-30

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All legislative references referred to herein are from the Income Tax Assessment Act 1997, unless otherwise stated.

A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. The capital gains provisions may apply whenever a CGT event happens.

CGT event A1 occurs when a disposal contract is entered into, or if there is no contract, when an entity stops being an asset's owner. The time of the event is when you enter into the contract for the disposal of the asset, or if there is no contract, when the change of ownership occurs. A capital gain is made by each owner of the asset in according with their ownership interest.

You acquire a CGT asset when you become its owner. You are regarded as the owner of an asset if you have a legal or equitable interest in the land or a right to occupy it.

Any capital gain or capital loss from a CGT event happening in relation to a CGT asset is made by the partners individually.

Each partner's gain or loss is calculated by reference to the partnership agreement, or partnership law if there is no agreement. The partners have their own separate cost base for their interest in the CGT asset.

In your situation, the couples are the registered owners of the XX acre property and have an undivided interest in the land.

Your intention is to subdivide the land into X acre lots and have each couple own separate lots. Therefore, as a result of the subdivision each owner has disposed of an interest in their original property and gained separate identifiable lots. There will be a change to the registered title and ownership of the land, resulting in a CGT event.

Calculating Capital Proceeds

Division 116 explains how to work out the capital proceeds from a CGT event. Section 116-20 provides some general rules about capital proceeds. Subsection 116-20(1) states that the capital proceeds from a CGT event are the total of the money a person has received, or is entitled to receive and the market value of any other property that the person has received, or are entitled to receive (worked out at the time of the event), in respect of the event happening.

Where the vendor does not receive any capital proceeds from the CGT event, then subsection 116-30(1) will apply. The subsection states that if you have received no capital proceeds from a CGT event, then you are taken to have received market value of the CGT asset that is the subject of the CGT event, worked out at the time of the event.

Note that in Capital Gains Cell Determination TD 10 it says to find a market value you can choose to obtain a valuation from a qualified valuer or use some other reasonable valuation based on supporting documentation.

Therefore, where you need to establish the market value of the property when you subdivide and transfer it into the individual couples names, you may either use a valuation from a registered valuer or use another fair and reasonable method.

Selling subdivided lots to a third party

This ruling does not consider the tax consequences of you on-selling your newly subdivided lots from your partly owned XX acre property or your XXX acre property. Please note that there would be further tax implications if this were to happen.

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