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Edited version of your written advice
Authorisation Number: 1013106377505
Date of advice: 13 October 2016
Ruling
Subject: Capital gains tax
Question 1
Did you acquire the property as a result of CGT event E1 or E2 occurring?
Answer
No.
Question 2
Did you acquire the property as a result of CGT event A1 occurring?
Answer
Yes.
Question 3
Does the cost base of the property you acquired include its market value at the acquisition date?
Answer
Yes.
Question 4
Will you realise a capital gain as a result of the sale of the property?
Answer
No.
Question 5
Will there be any income or expense amounts that will be on revenue account during the life of the statutory trust?
Answer
No.
Question 6
Will you be required to pay tax under subsection 98(3) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to any net income?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 20YY
Year ended 30 June 20XY
Year ended 30 June 20YZ
Year ending 30 June 20ZZ
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
In 200X, a contract was exchanged on a specified property (the Land).
The Land was described as a commercial property.
The purchasers of the Land were 50% (Tenants in Common) A and B (as Joint Tenants) and 50% C and D (as Joint Tenants). The purchasers registered as a partnership for GST. The purchasers will be referred to as the Partnership in future references.
The purchase was settled in 201X.
The Land was purchased as a taxable supply, and the Partnership claimed the input tax credits in relation to the acquisition of the Land.
The Partnership acquired the Land for use in carrying on a business of commercial trade.
The Partnership's only activity after the acquisition of the Land was that of (further) planning for their business of commercial trade.
The Partnership does not carry on any other enterprise.
Following the purchase of the Land the Partnership fell into disagreement about the business (as opposed to the Land itself) before commencing any trade.
The Land has remained vacant since the acquisition in 201X.
A and B applied to the Relevant Court for the appointment of Trustees over the Land for the purpose of eventual sale.
In 201X, you were appointed by the Relevant Court as Trustees for the purpose of selling the Land.
The Court Order provides:
● The Land vested in you, as Trustees to be held by the Trustees upon the statutory trust for sale under Division 6 of Part 4 of the Conveyancing Act 1919 (NSW).
● The Land is to be listed for sale by auction or private treaty at a price agreed in writing by the plaintiffs and defendants, failing any such agreement, the Trustees are to obtain a valuation of the Land and list the Land for sale at a fair market value determined by a registered valuer.
● The Trustees are empowered to retain a real estate agent and solicitors in respect of the sale of the Land.
● Any of the parties to the proceedings are at liberty to purchase the Land at a fair market value as agreed in writing by the plaintiffs and defendants.
(a) The Trustees shall hold and apply the net proceeds of sale of the Land in the following manner and priority:
(b) auction expenses, agent's commission, and all other expenses of sale;
(c) discharge of existing mortgage;
(d) reasonable legal expenses of the Trustees in respect of the sale;
(e) reasonable fees of the Trustees;
(f) plaintiffs' (A and B) legal costs;
(g) balance to be equally divided between the four parties to the Order.
A and B have made an offer to purchase the land. No contracts have yet been exchanged.
The offer has been “approved” by C and D.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 104-55 and
Income Tax Assessment Act 1997 Subsection 110-25(2)
Reasons for decision
Trustee acquisition
Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs (subsection 104-10(3)).
CGT event E1 in section 104-55 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1)). The time of the event is when the trust over the asset is created (subsection 104-55(2)).
ATO Interpretive Decision ATO ID 2009/129 provides that CGT event A1 occurs when property vests in a statutory trustee pursuant to section 38 of the Property Law Act 1974 (Qld).
Specifically, ATO ID 2009/129 states:
CGT event E1 did not happen when the trust was created over the property. That event happens if you create a trust over a CGT asset by declaration or settlement: subsection 104-55(1) of the ITAA 1997.It is considered that this event has no application where the trust is created by order of a court, rather than by the actions of the owners of the property. That is, given the court's role, it is impossible to cast the co-owners in the role of 'you' for the purpose of CGT event E1.
In your case, it is considered that a change of ownership occurred from the co-owners to you as trustees, by virtue of the court order. Therefore, CGT event A1 happens.
As there was no contract for the disposal, CGT event A1 is taken to have happened when the change in ownership occurred, which in this case is when the property vested to the trustee on the making of the court order.
Trustee disposal
When the property is disposed of CGT event A1 will occur on the date of the contract. The CGT event will result in a capital gain if the capital proceeds from the disposal are more than the cost base of the asset.
As a result of the court order, the trustees acquired the property. The first element of the cost base of the property for the trustees will be equal to the amount paid, or required to be paid, in respect of acquiring the property (subsection 110-25(2) of the ITAA 1997).
At the time of the court order, the trustees did not pay anything to acquire the property. However, the trustees were required to pay the net proceeds from the sale of the property to the partners, including by way of discharging the relevant mortgages. Other costs incurred in relation to the sale of the property may form part of the cost base.
Accordingly, the cost base of the property will equal the capital proceeds from the disposal. Therefore, the disposal of the property will not result in a capital gain.
Income and expenses of the trustees
The trustee is not holding the property for any income producing or business related purpose; therefore they will not earn any income, or incur any expenses on revenue account. Therefore, there will not be any income for the trustee to pay any withholding tax on.
Accordingly, all expenses of the trust will form part of the cost base of the property.
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