Edited version of private ruling

Authorisation Number: 1011590045418

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Ruling

Subject: Acquisition of post-CGT land to be amalgamated to pre-CGT land title.

Subject

Capital gain tax - Post- CGT Asset to be added to Pre-CGT Asset.

This ruling applies to:

Applicant land owner

Issue 1

Purchase of additional land which is a post-CGT Asset that will be added onto the applicant's current title of a pre-CGT farm land.

Question 1

Whether upon sale of the combined land in the future as stated on the current title, the pre-CGT land retains it pre-CGT status and only the additional post-CGT land is subject to CGT rules?

Advice/Answers

Yes,

The Pre CGT asset retains its pre-CGT status and the post-CGT asset is subject to CGT rules.

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The applicant taxpayer acquired /inherited a number of Acres of land pre 20 September 1985 which was used and is currently used for the following purposes:

· Farming land (Grain production and or grazing of livestock).

· Particular livestock farming that has had improvements over the years and have been recorded separately for income producing purposes.

· On the pre 20 September land exists a property which is used by the applicant as his private residence.

The primary production business (farming) and livestock business are run through a family trust and continue to do so, with no intention of stopping over the next 3-5 years.

The applicant has recently been offered to buy neighbouring land to add to his existing main pre-CGT property. The offer for the neighbouring land was for 100%, but the applicant made a counter offer to accept a lesser %, to which the vendor has agreed.

The arrangement will be that the additional post-CGT parcel of certain acres of land will be added to the current title held by the applicant which covers the pre-CGT asset of certain acres of land.

The applicant in his submission states the Real Estate Agent and the Real Estate Agent Institute have advised him this can be done without the vendor applying for a new title for his disposing portion of the acres of land.

They also advised the applicant that the purchaser can just add this portion of acres of land to his current title as the two properties are next to each other.

The applicant in his submission also states that the advice he received relating to the purchase and addition of the adjoining neighbouring land to his current title, includes the following:

· The existing owner (the applicant ) of the pre-CGT Asset (xxx Acres of land) will be the only owner/buyer of the new parcel of xxx Acres to be combined/added to his pre-CGT asset title.

· At disposal of the property at some point in the future, the original pre-CGT parcel of xxx acres retain their pre-CGT status as per Division 149 and only the new acquired parcel of xxx Acres of land is subject to CGT.

· The combination of both the pre and post-CGT parcels of land does not constitute a CGT event under subsection 104-5 of Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997).

· The combination of both the pre and post-CGT parcels of land does not constitute a CGT disposal under Subdivision 104A of the ITAA 1997 to form a new piece of land or new asset.

· The underlying interest in the pre-CGT asset will not change pursuant to the application of subsection 149-15 of Division 149 of the ITAA 1997.

The Tax Agent representing the taxpayer states that she discussed the arrangement and question relating to CGT implications as a result of the proposed additional land acquisition, and was given the following example and answer of pre-CGT land, where a house was constructed on it post-CGT. Provided the house/property was build for income producing purposes, only the house is subject to CGT. The pre-CGT land retains its pre-CGT status, with the base vale being the current market value at the date of construction.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 149-15

Income Tax Assessment Act 1997 Section 180-65

Reasons for decision

Issue 1

Question 1

Detailed reasoning

The Capital gains tax (CGT) regime applies where a CGT event happens to Capital gains tax asset (CGT asset) acquired by a taxpayer after 19 September 1985.

An asset acquired pre 19 September 1985 is characterised as a Pre-CGT asset.

An asset acquired post 19 September 1985 is characterised as a Post-CGT asset.

The capital gains tax provisions are contained in Part 3-1 to 3-3 of the Income Tax Assessment Act 1997 ( ITAA 1997)

Subsection 104-5 of Division 104 in part 3-1 of the ITAA 1997 provides a summary of the CGT events which will give rise to a capital gain or a capita loss as result of the CGT event happening.

A taxpayer can only make a capital gain or a capital loss if a CGT event happens.

Generally, you acquire a CGT asset when you become its owner. You may acquire a CGT asset because:

A CGT event happens to someone else (for example, the transfer of land to you under a contract of sale). If you acquired an asset because of a CGT event, you are generally taken to have acquired the asset at the time of the CGT event. For example, if you enter into a contract to purchase a CGT asset, the time of acquisition is when you enter into the contract. However, if you obtain an asset without entering into a contract, the time of acquisition is when you start being the asset's owner.

Other events or transactions happen that are not the result of a CGT event happening to someone else. For example, if a company issues or allots shares to you (which is not a CGT event), you acquire the shares when you enter into a contract to acquire them or, if there is no contract, when they are issued or allotted.  

Other special CGT rules. For example, if a CGT asset passes to you as a beneficiary of someone who has died, you are taken to have acquired the asset on the date of their death. Also, if you start using your main residence to produce income for the first time after 20 August 1996, you are taken to have acquired it at its market value when it is first used to produce income.

The time of acquisition of a CGT asset is important for four reasons:

· CGT generally does not apply to assets acquired before 20 September 1985 (pre-CGT assets).  

· Different cost base rules apply to assets acquired at different times - for example, the costs of owning an asset are not included in the cost base if you acquired it before 21 August 1991. 

· It determines whether the cost base can be indexed for inflation and the extent of that indexation (see The indexation method of calculating your capital gain on the ATO's website www.ato.gov.au). 

· It determines whether you are eligible for the CGT discount - for example, one requirement is that you need to have owned the CGT asset for at least 12 months (see The discount method of calculating your capital gain)

What are Capital Gains Tax Assets (CGT Assets):

CGT Assets are defined in s 108-5 of the ITAA 1997 as "any kind of property" or "a legal or equitable right that is not property."

Specific examples of CGT assets listed in the legislation include:

Land and buildings; shares in a company and units in a unit trust; options; debts owed to you; a right to enforce a contractual obligation; foreign currency.

Most often, a tax payer will be faced with a capital gains tax bill on the sale of shares or real property. Before disposing of any property, taxpayers should be aware of the CGT implications, paying particular attention to the CGT holding rule which may entitle a taxpayer to a CGT discount.

The applicant's request for a private binding ruling relates to the proposed arrangement to acquire additional adjoining land and add it his existing land which was acquired pre 19 September 1985. The acquired additional land will be added to his current title and will not result in an additional title being created.

For CGT purposes, the acquisition of the xxx acres parcel of land will result in the creation and holding of two assets. A pre-CGT asset and a post-GCT Asset.

Section 180-65 of the ITAA 1997 states that if you acquire land on or after 20 September 1985 that is adjacent to land (the original land) you acquired before that day, is taken to be a separate CGT asset from the original land if it and the original land are amalgamated into one title.

As such the acquisition and addition of the new parcel of xxx acres of land to the existing title of the pre-CGT xxx acres of land, will not give rise to a CGT event as described in section 104-5 of the ITAA 1997.

Following the execution of the sale and purchase agreement between the applicant as a purchaser and the vendor as the seller, the applicant will become the owner of the new parcel of xxx acres of land. The amalgamation of the two adjoining properties now owned by the applicant to one title does not involve the change of ownership of the land from the applicant's position and there in no disposal of the land for CGT purposes.

As stated above, following the acquisition and addition of the new parcel of xxx acres to the pre existing title of xxx acres of land, will create the holding of pre-CGT Asset and a post-GCT asset for the purposes of the application of the CGT regime as it applies at the time.

This is in line with the Commissioner's view in CGT Determination Number 8 (CGT TD 8).

The example given by the Commissioner in paragraph 2(ii) of TD 8, states that if one property was acquired pre-CGT and the other after 19 September 1985, there are no CGT consequences on the amalgamation. The land acquired after 19 September 1985 remains subject to the GCT provisions and the pre-CGT land remains exempt.

As such it is necessary for the applicant to maintain the necessary and relevant records relating to the values and costs of the land, for the purposes of establishing the cost base of the assets, especially the newly acquired post- CGT asset and the calculation of the capital gain up on disposal of this asset.

The cost base of an asset is generally what it costs you.

It is made up of five elements:

· the money you paid or property you gave for the asset

· the incidental costs of acquiring or selling it (for example, brokerage and stamp duty)

· costs of owning it (generally this will not apply to shares or units because you will usually have claimed or be entitled to claim these costs as tax deductions)

· costs associated with increasing or preserving its value, or with installing or moving it, and

· what it has cost you to preserve or defend your title or rights to it - for example, if you paid a call on shares.

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

No

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