Edited version of your private ruling

Authorisation Number: 1012561616408

Ruling

Subject: Capital gains tax - subdivision of land and transfer of blocks to shareholders

Question 1:

Is an amount included in your assessable income under section 6-5 and 15-15 of Income Tax Assessment Act 1997 (ITAA 1997) or any other provisions in the income tax legislation, as a result of the transfer of the subdivided land to your shareholders?

Answer:

No.

Question 2:

Will a capital gains tax (CGT) event occur when the subdivided land is transferred to the shareholders?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on

1 July 2013

Relevant facts and circumstances

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 a property which is used by a group of families for residential purposes.

The property consists of a number of shares, each owned by one or more members of each family, a share per family.

The property was originally owned by person A and person B's parents.

Prior to 20 September 1985, the property was gifted to person A and person B, along with person B's then spouse.

Person B's spouse subsequently left and their name was removed from the title two years later.

Three years later person A and person B decided to transfer the property to you in order to allow additional families to legally build homes on the property.

Each family (shareholder) have each individually paid for construction of their own residences.

All dwellings were constructed on the land prior to 20 September 1985.

Under this arrangement, a share is owned by person A and a share by person B.

A number of additional shares were sold for $X.

Person C and person D owned a share.

After 20 September 1985, person C and person D divorced and person C disposed of their share to person D for an amount of $x.

One share has changed hands numerous times, most recently to person E and person F after

20 September 1985, for $X.

Since the time the company was originally formed, zoning rules have undergone substantial changes.

The company approached the council and have been advised that it is now possible to subdivide the property.

You will subdivide the property and pay all costs associated with the subdivision.

You will transfer ownership of the subdivided block to the existing shareholders.

As a result of the subdivision each shareholder will own their house and a specified percentage of the property which includes the land on which the dwelling stands on.

The company will be wound up with any remaining liabilities transferred equally to the shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-15

Income Tax Assessment Act 1997 Section 149-30

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Income tax

Under section 6-5 of the ITAA 1997, your assessable income includes ordinary income you derive directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out a profit-making undertaking or plan. This provision does not apply to a profit that is assessable as ordinary income, or which arises in respect of the disposal of property acquired on or after 20 September 1985.

Section 6-5 and 15-15 of the ITAA 1997 can apply in cases where land is subdivided as a business operation or commercial transaction, or an isolated profit making venture.

In your case, you are simply subdividing the land as a means of transferring ownership of the parts of the land to your shareholders, and the subdivision and transfer is not a profit-making undertaking or plan.

Therefore, no amount is included in your assessable income upon the subdivision and subsequent transfer of land to the shareholders.

Capital gains tax

The most common CGT event (CGT event A1) happens if you dispose of an asset to someone else. 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 of if there is no contract when the change of ownership occurs.

CGT event A1 will occur when you transfer the subdivided land to the shareholders.

Subdivision

If you subdivide a block of land, each block that results is registered with a separate title.  For CGT purposes, the original land parcel is divided into two or more separate assets. 

Subdividing land does not result in a CGT event.

Therefore, you do not make a capital gain or capital loss at the time of subdivision.   The date you acquired the subdivided blocks is the date you acquired the original land in 1982.

Generally, you can disregard any capital gain or capital loss you make on an asset if you acquired it before 20 September 1985.

However, there are circumstances where a CGT asset acquired before 20 September 1985, will not be a pre-CGT asset, because it is taken to have been acquired after 20 September 1985. An example of this is where a change in the majority underlying interests occurs, in which case the CGT asset is deemed to be acquired after 20 September 1985. Essentially, a CGT asset acquired before 20 September 1985, remains a pre-CGT asset if the majority underlying interest in the asset has not changed since 20 September 1985.

A CGT asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset was not held by the ultimate owners who held the majority underlying interests in the asset immediately before 20 September 1985. The Commissioner has to be satisfied that the majority underlying interests in the asset has not changed. Otherwise the asset is deemed to have been acquired at the time that the change in the majority underlying interest in the asset happened.

'Majority underlying interest' is defined as more than 50% of:

· the beneficial interests that 'ultimate owners' hold (whether directly or indirectly) in the asset, and

· the beneficial interests that 'ultimate owners' hold (whether directly or indirectly) in any income that may be derived from the asset.

· The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. In general law, a shareholder does not have any legal or equitable interest in an asset of a company. Thus, it would be difficult to see how an asset of a company can satisfy the 'majority underlying interest's test and remain pre-CGT.

Income Taxation Ruling No IT 2340, paragraph states:

'The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.'

Applying the 'look through' approach, a shareholder is treated as having a beneficial interest in the company's assets.

In this case, the shareholders of the company, natural persons, are treated as having beneficial interests in the assets of the company and would be the 'ultimate owners" of the assets. These interests, in the assets and in income derived from the assets, are represented by the shareholdings.

You acquired the property prior to 20 September 1985. The ultimate owners, who held the majority underlying assets in the property immediately before 20 September 1985, are person A, person B and person D, who together held more than 50% of the issued shares. These shareholders now hold more than 70% of the issued shares. As the majority of the underlying interests in the property Road has not changed since 20 September 1985, it therefore remains a pre-CGT asset.

Therefore, upon the transfer of the subdivided blocks to the relevant shareholders any capital gain or capital loss made is disregarded.

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