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Edited version of private ruling
Authorisation Number: 1011593796745
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Ruling
Subject: Receipt of monies from an Owners Corporation
Question: Is money received from an Owners Corporation treated in the hands of the recipient as ordinary income, a capital gain or a reduction of the cost base of the asset?
Answer: Money received from an Owners Corporation will be treated as a capital gain in the hands of the recipient member in these circumstances.
This ruling applies for the following period:
1 July 2009 - 30 June 2010
The scheme commenced on:
1 July 2009
Relevant facts
You are the owner of car parking spaces in a commercial car park.
Both parking spaces were purchased post CGT.
You belong to the Owners Corporation (previously known as a body corporate) which operates/administers these parking spaces.
Being a member of the Owners Corporation provides you with an interest in it which bestows certain rights to you.
This interest gives you the rights to a share of the assets of the Corporation and to the proceeds thereof.
The Owners Corporation utilised some of the common property, and created additional car spaces.
The Corporation sold the new car spaces and paid the member a proportionate amount.
The taxpayer's cash receipt was between $3000 - $4000.
Relevant legislative provisions:
Income Tax Assessment Act 1997
Section 104-10
Section 108-5
Section 115-A
Section 116-20
Rulings and Determinations:
Taxation Ruling TR 97/4 (ATO View)
Income Tax ruling IT 2505
Reasons for decision:
Summary:
The taxpayer as a member of the Owners Corporation (previously known as a body corporate) would be entitled to an interest in the assets managed by the body corporate. The common property is an asset of the body corporate and every owner of a lot, is a part owner thereof. When the Owners Corporation resolved and developed some of the common property to create additional car spaces and sold them, it made a capital gain. It is a portion of this capital gain the applicant received in accordance with their interest and entitlement as a member of the Owners Corporation.
As the property was a post CGT asset, the sale of the new car spaces constitutes a A1 CGT event under section 104-10 of the Income Tax assessment Act of 1997 (ITAA 1997). The net proceeds from the sale of the common property is a capital gain made by the Owners Corporation. Any amount paid to an individual owner of a lot as an entitlement is considered to be their share of the capital gain which must be included in the individual's tax return.
The taxpayer may qualify for the 50% reduction concession on this.
Capital gain if the conditions of subdivision 115-A of the ITAA 1997 are satisfied.
Detailed reasoning:
A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) describes what is considered a CGT asset. A CGT asset is any kind of property, or a legal or equitable right that is not property.
Under section 104-10 of the ITAA 1997, the disposal of a CGT asset gives rise to CGT event A1. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether it is because of some act or event or by operation of law. The time of the event is the time you enter into a contract for disposal of the asset, or if there is no contract, the time at which ownership changes.
Taxation ruling TR 97/4 sets out the Commissioner's view on the ownership of strata title units and ownership of common property and specifies that beneficial ownership of common property is universally vested in the stratum unit owners.
Paragraph 24 of TR 97/4 on ownership of stratum units states:
Stratum units are owned both legally and, unless held on trust, beneficially by each individual stratum unit owner.
The Owners Corporation is carrying on the business of selling the car parking spaces to purchasers who on becoming owners, became unit holders of the corporation. The Owners Corporation has a duty to look after the interests of the unit holders. Your membership in the Owners Corporation, by virtue of being the owner of car spaces, bestows certain rights to you as a unit holder. When the Corporation developed the common property to create additional car spaces and sold them to new purchasers, you received a share of the proceeds as a cash entitlement.
Capital proceeds of a CGT event are defined in section 116-20 of the ITAA 1997 as being money received in respect of the event happening, or the market value of any property received in respect of the event happening.
The Owners Corporation has made a capital gain by developing and selling its assets which were part of its common property. As a member of the Corporation you received your entitlement of the capital proceeds. As it was a sale of a CGT asset, it caused a capital gains tax event A1: disposal of an asset as defined in section 104-10 of the ITAA 1997.
The amount received in cash is your portion of the capital gain. It is your capital gain as you received it from the development of the common property which belonged to all the lot holders and which was left in the care of the Corporation. The Owners Corporation was merely an agent for the principals who are the lot owners. It is the lot owners who have disposed of an asset which was part of the common property and who have made the capital gain, therefore you will need to include it in your tax return for the relevant year.
The proceeds of sale of the common property will not be applied to reduce the cost base as its source has no direct relation to the cost base of the assets owned by the individual unit/lot holders.
Conclusion
It is concluded the cash amount received by the taxpayer will constitute a capital gain made by the individual, through a share of the Owners Corporation and will therefore need to be included in the tax return for the relevant year.
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