Edited version of your written advice

Authorisation Number: 1051189882623

Date of advice: 22 February 2017

Ruling

Subject: Transfer of stratum units

Question 1

Will the subdivision of a property into separate strata titles be considered a Capital Gains Tax (CGT) Event in accordance with section 112-25 of the ITAA 1997?

Answer

No

Question 2

Will the transfer of separate titles to shareholders be a CGT event for and, if so, will the capital losses or capital gains be disregarded in accordance with section 118-42 of the ITAA 1997?

Answer

Yes

Question 3

Will Part IVA of the ITAA 1936 apply to the transaction?

Answer

No

This ruling applies for the following periods:

1 July 2016 – 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

1. The Company acquired the Property prior to 19 September 1985. It is the only asset owned by the Company.

2. Shares are issued for particular Flats and Car parks.

3. The Constitution of the Company entitles the shareholder to exclusive occupancy of a particular flat, the corresponding car park and the common areas of the building.

Transaction

4. The Company will register a strata plan for the building and grounds at the Property. This will separate the titles for the relevant flat, corresponding car space/s into X strata units and common property held by an owners’ corporation.

5. The transaction consists of transferring the freehold title to the relevant shareholders in accordance with their entitlements as the holder of one or more groups of shares.

6. A folio of the strata title register will be allocated for common property in the name of the Owners Corporation to be created on registration of the plan of subdivision.

7. The shareholders unanimously passed a motion to wind up the Company after subdivision and strata title transfer occurs.

8. ASIC will deregister the Company under voluntary deregistration application under section 601AA(1) and (2) of the Corporations Act 2001 using Form 6010.

9. The provisions provided in sections 257A to 257H of the Corporations Act 2001 do not apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 118-30

Income Tax Assessment Act 1997 Section 118-42

Income Tax Assessment Act 1997 Section 124-190

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Subsection 177A(3)

Income Tax Assessment Act 1936 Subsection 177A(5)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Reasons for decision

Question 1

Will the subdivision of a property into separate strata titles be considered a Capital Gains Tax (CGT) Event in accordance with section 112-25 of the ITAA 1997?

Summary

10. Section 112-25 of the ITAA 1997 provides for split, changed or merged assets. In particular paragraph 112-25 (1)(b) says that:

A CGT asset (also the original asset) changes in whole or in part into an asset (also the new asset) of a different nature;

And you are the beneficial owner of the original asset and each new asset.

Example:

You subdivide a block of land into 3 separate blocks. Each of those blocks is a new asset.

11. Furthermore subsection 112-25(2) specifies:

The splitting or change is not a CGT event.

12. Under the proposed restructure it is submitted that the Company will subdivide the Property into strata units (Lots). A Lot will represent the corresponding flat, respective car parking space and stake in the common property held by an owners corporation which is achieved by registering a strata plan. On registering strata plan, a separate title is created for each Lot.

13. As the change of structure does not result in the change of beneficial owner of the original or new asset this is not considered to be a CGT event in accordance with section 112-25 (2) of the ITAA 1997.

Question 2

Will the transfer of separate titles to shareholders be a CGT event for and, if so, will the capital losses or capital gains be disregarded in accordance with section 118-42 of the ITAA 1997?

Summary

14. Section 118-42 of the ITAA 1997 provides CGT concessions in respect of strata title conversions. This exemption is available to the owner of the land. When a building is converted to strata title units, an exemption from CGT is granted to the taxpayer who owned the land on which the building was situated, and who subdivided the building into stratum units, and transferred each unit to the entity who had the right to occupy it just before the subdivision, as follows;

If:

(a) you own land on which there is a building; and

(b) you subdivide the building into stratum units; and

(c) you transfer each unit to the entity who had the right to occupy it just before the subdivision;

a capital gain or capital loss you make from transferring the unit is disregarded.

15. A stratum unit is defined in subsection 124-190(3) of the ITAA 1997 as a lot or unit and any accompanying common property. While ownership interest in land is defined in section 118-30 to mean having a legal or equitable interest in it or the right to occupy it.

16. The Company owns the land on which the building is situated, and when registration of the strata plan occurs, the stratum units and common property will be transferred to the shareholders. These are the same entities that have held rights to occupy the unit in the building before the strata title conversion. This means any capital gains or losses made by the Company from the transfer to the shareholder of the stratum units and common property are disregarded when transferred to that shareholder. Therefore in accordance with 118-42 of the ITAA 1997, the Company is able to disregard any capital gain or loss resulting from this transaction.

Question 3

Will Part IVA of the ITAA 1936 apply to the transaction?

Application of Part IVA

17. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

18. In broad terms, Part IVA will apply where the following requirements are satisfied:

● there is a scheme (see section 177A)

● a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C)

● the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)).

19. The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.

Application to your circumstances

20. What is being proposed is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in paragraph 177C(2) of the ITAA 1936, these factors eliminate the scheme from being further considered against the application of Part IVA. Therefore, Part IVA will not apply to this arrangement.

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