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Edited version of your written advice
Authorisation Number: 1013073927120
Date of advice: 19 August 2016
Ruling
Subject: Pre-CGT asset- whether maintains its status despite incorporation
Question:
Whether the pre capital gains tax (CGT) asset of the taxpayer would maintain its status under Division 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) despite the taxpayer becoming incorporated post CGT?
Answer:
Yes.
This ruling applies for the following period:
From 1 July 20xx to 30 June 20xx
The scheme commences on:
x/xx/ 20xx
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 purchased a parcel of land pre-CGT under a trust with you being the only beneficiary. Except for, the change of the trustees, no other change was made to the trust deed.
You constructed a building on the land pre-CGT and completed the construction pre-CGT. No extension or capital improvement to the land or building was done post-CGT.
You became incorporated post-CGT.
You sold the building recently and made a capital gain.
Reasons for decision
When a CGT asset, for example any kind of property or a legal or equitable right changes its ownership from one entity to another, there is a CGT event (CGT event A1) under section 104-10 of the ITAA 1997. When there is a CGT event, there is a CGT consequence, namely CGT gain or CGT loss for the entity disposing of the asset. However, there are exceptions whereby the gain or loss is disregard. One such exception is if the entity disposing the asset acquired it before 20 September 1985, which is before CGT laws were introduced. These assets are known as pre-CGT assets.
In your case, when you sold your asset, CGT event A1 happened on the day the contract for the sale of the asset was entered into. However, since you acquired the asset prior to 20 September 1985, the asset is a pre-CGT asset and therefore is subject to the exception whereby your capital gain would be disregarded.
A pre-CGT asset can become a CGT asset if a CGT event happens to the asset post-CGT. Section 104-5 of the ITAA 1997 lists all the CGT events and incorporation of an entity is not listed as one of those events.
Beside a CGT event, a pre-CGT asset can lose its status in certain instances, for example if there is a change in the majority underlying interest in the asset (Division 149 of the ITAA 1997), if any construction was done on the land (section 108-55 of the ITAA 1997) or if any capital improvement is done to the asset (section 108-70 of the ITAA 1997) after 20 September 1985. Since none of these happened to your asset, the asset maintained its pre-CGT status until its disposal.
Therefore, the capital gain from the sale of the asset is disregarded.
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