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Ruling

Subject: Capital gain tax and property subdivision

Questions:

1. Is the amalgamation and subsequent sub-division of the properties CGT events for capital gains tax purposes?

Answer:

No.

Question:

1. Will the gifting or sale of one of the properties to a family member be subject to the capital gains tax provisions?

Answer:

Yes.

Question:

What are the GST consequences of the consolidation and subsequent sub-division of the two properties?

Answer:

None of the co-owners of the properties are required to be registered for GST and there are no GST consequences from the development.

This ruling applies for the following period

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Four family members are in the process of consolidating and subdividing two properties and building five units in two stages.

Property one was originally purchased by Mr and Mrs A prior to 20 September 1985 and was used as their primary place of residence until 20YY when they moved into property two.

Property two (next door to property one) was purchased by Mr and Mrs A, Mr C and Mr D in 20YY. The four parties each owned a 25% interest in property two.

Stage 1 involves consolidating the two properties and dividing it into three.

Lot 1 - to be used by Mr D as his primary residence

Lot 2 - to be gifted/sold by to a family member to use as their primary residence

Lot 3 - to be used by Mr and Mrs A and Mr C

Stage 2 involves dividing Lot 3 into three.

Lot 3 - to be used by Mr C to as his primary residence

Lot 4 - to be used by Mr and Mrs A as a rental property

Lot 5 - to be used by Mr and Mrs A as their primary residence

To date, Stage 1 has been completed with not in common ownership (NICO) titles being issued for Lots 1, 2 and 3.

A partition agreement is currently with a solicitor. After the development, Lot 1 will be owned by Mr D and Stage 2 - Lot 3 will be owned by Mr C.

None of the owners are in the business of property development and none are registered for GST.

The owners intend to hold all of the properties for at least five years.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 104-10

Income Tax Assessment Act 1997 - Section 112-20

Reasons for decision

Amalgamation and subdivision

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Generally, CGT event A1 will happen when the title to two properties owned by different entities is merged. This is because each co-owner acquires, as a result of the merger, an interest in the land previously owned by the other.

However, a NICO title does not involve co-ownership of land in the generally understood sense (that is, a tenancy in common or joint tenancy). The NICO title recognises that each proprietor continues to own the land described in their previous title deed (though the NICO title requires both owners to agree to any subsequent transfer of any part of the land).

Similarly, subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

In your case, Stage 1 has been completed with not in common ownership (NICO) titles being issued for Lots 1, 2 and 3. As discussed above, it is considered that there has been no change of ownership of the two properties.

Therefore, CGT event A1 in section 104-10 of the ITAA 1997 has not happened and the land owned by each of you before the issuing of the NICO titles continues to be owned by the each of you after the issuing of the NICO titles. This means that Property one, acquired before 20 September 1985, continues to be pre-CGT land for the original owners.

Gifting of Lot 2

As stated above, CGT event A1 happens if you dispose of a CGT asset. You dispose of an asset when a change of ownership occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs (section 104-10 of the ITAA 1997).

You have stated that Lot 2 will be sold at a reduced rate or gifted to a related party on completion of the development. This is considered to be a disposal for CGT purposes.

The capital gains tax (CGT) provisions apply whenever the owner of a CGT asset (such as property) disposes of their ownership interest in that asset to another person whether by sale or gift.

Generally, the capital proceeds from a CGT event are the total of:

· any amount or amounts of money received in respect of the CGT event;

· any property other than money, in which case, the capital proceeds are the market value of that property at the time of the event; and

· both an amount or amounts of money and property other than money, in which case, the capital proceeds is the sum of that amount or those amounts and the market value of that property at the time of the event.  

Where no proceeds or less than market value are received, the market value substitution rule may apply (section 112-20 of the ITAA 1997).

Market value substitution 

The market value substitution rule applies where: 

1)      there are no capital proceeds from the event - for example, if the disposal of the CGT asset is by way of gift; or

2)      some or all of the capital proceeds from the event cannot be valued; or

3)      the capital proceeds are more or less than the market value of the asset and either:

i)        you disposed of an asset and the purchaser that acquired the asset from you did not deal with each other at arm's length in connection with the event; or

ii)       the CGT event is the redemption, release, abandonment, surrender, forfeiture or cancellation of the asset.

In working out the market value of your property, Taxation Determination TD 10 lists what are acceptable valuations for CGT purposes. Where the market value of a property needs to be determined, you can choose to: 

· Obtain a detailed valuation from a qualified valuer; or,

· Compute your own valuation based on reasonably objective and supportable data.

In your case, if no proceeds or less than market value is received for Lot 2 from a family member, the market value substitution rule will apply when determining the capital proceeds.

Please note: A building or structure constructed on land acquired before 20 September 1985 is taken to be a separate CGT asset from the land. Therefore, any units built on the original pre-CGT property (Lots 2 & 4) will be considered to be a separate CGT asset and, therefore, will be subject to CGT upon their disposal.

Goods and Services Tax (GST)

The transfers of the respective ownership interests will be subject to GST if it is made in the course or furtherance of an enterprise that a co-owner operates. This test needs to be determined for each co-owner separately.

Goods and Services Tax Ruling, GSTR 2009/2 Goods and services tax: partitioning of land (GSTR 2009/2) discusses the GST consequences of dividing land between co-owners (partitioning). Paragraph 64 of GSTR 2009/2 states:

… the supply of an interest in land under a partition is capable of being made in the course or furtherance of an enterprise where the relevant interest in the land has been applied in an enterprise carried on by the co-owner.

We understand that none of the co-owners are carrying on an enterprise related to property development. Therefore, it needs to be determined whether these activities undertaken in this development constitute carrying on an enterprise for any of the co-owners. Excluded from the meaning of enterprise is activities that are a private recreational pursuit or hobby and also activities done by an individual or partnership without a reasonable expectation of profit or gain.

The activities undertaken by both Mr C and Mr D will result in them being the owner of Lot 3 and Lot 1 respectively and each property will be used as their primary residence. Therefore, the activities do not amount to an enterprise as they are private in nature. Furthermore, there is no reasonable expectation of profit or gain resulting from the subdivision. Initially, they each owned 25% of Property two and, following the subdivision, they each owned one of the 5 properties (roughly equating to 20% of the total value).

Similarly, Mr and Mrs A are not undertaking activities that constitute an enterprise in relation to Lot 5, which will be their primary residence, or Lot 2, which will be gifted/sold to a family member. These activities are of a private or domestic nature.

However, the renting of Lot 4 does amount to an enterprise within the meaning of the GST Act. Nevertheless, the rental of residential premises is an 'input taxed supply' which means that it is not subject to GST and the supplier (owner) is not entitled to claim any GST credits in relation to that supply. Paragraph 14 of Goods and Services Tax Ruling, GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? states:

. . . the GST Act provides that where residential premises are sold after five or more years of being rented continuously, they are not new residential premises and the sale, therefore, is an input taxed supply. An entity that is intending to rent out the residential premises is not entitled to claim input tax credits in respect of construction and acquisition costs of those premises.

Summary

None of the co-owners of the properties are required to be registered for GST and there are no GST consequences from the development if there is no intention to sell the properties within five years.

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