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Edited version of your written advice
Authorisation Number: 1051334122947
Date of advice: 2 February 2018
Ruling
Subject: Capital gains tax roll-overs
Question and Answer
Are you entitled to roll-over relief on any disposal which occurs as a result of the subdivision and transfer of property?
Yes
This ruling applies for the following periods
1 July 2017 to 30 June 2018
1 July 2018 to 30 June 2019
1 July 2019 to 30 June 2020
The scheme commences on
1 July 2017
Relevant facts and circumstances
You own as tenants in common an interest in a vacant land parcel.
The site has received town planning consent to build two separate units.
The decision was taken to acquire the land as tenants in common to enable one owner to develop and sell one unit and the other to retain and live in the second unit.
The construction of the units will be attended to by the same consultants, the same builders and the same subcontractors. All costs of the construction are separately tracked and are separately funded.
You entered into an agreement where you each had exclusive right to occupy a particular unit and upon completion of construction, two strata titles would issue with you each obtaining the strata title to the unit you had exclusive right to.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 118-42
Reasons for decision
A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) describes what is considered a CGT asset. A CGT asset is any kind of property, or a legal or equitable right that is not property.
Under section 104-10 of the ITAA 1997, the disposal of a CGT asset gives rise to CGT event A1. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether it is because of some act or event or by operation of law. The time of the event is the time you enter into a contract for disposal of the asset, or if there is no contract, the time at which ownership changes.
Taxation ruling TR 97/4 sets out the Commissioner’s view on tenants in common subdividing a building and transferring their interests so that each tenant in common becomes a registered proprietor of a stratum unit.
In this situation each tenant in common is prima facie liable for CGT, unless roll-over relief is available, on any disposal which occurs as a result of that subdivision and transfer. Disposals occur because the transfer of interests between tenants in common amount to a change in the legal and beneficial ownership of those interests. Corresponding with these disposals are acquisitions by the tenants in common of the interests disposed of.
Roll-over relief under 118-42 of the ITAA 1997 is available in respect of these disposals and acquisitions if a tenant in common satisfies the criteria in that section. Importantly, roll-over relief is only granted if, before the conversion process, the tenants in common entered into an agreement or understanding granting each tenant in common exclusive occupation (including an exclusive right of possession) of a particular unit.
If no such agreement or understanding exists between the tenants in common, then before conversion they will each have occupancy rights in relation to the whole building, rather than occupancy rights in relation to a particular unit. After conversion, they will have occupancy rights in relation to particular stratum units. In these circumstances, the tenants in common do not satisfy the requirement that the rights of occupancy in relation to the stratum units must be the same as the rights of occupancy which existed before the subdivision and transfer process took place. The tenants in common are therefore not entitled to roll-over relief.
In your case, an agreement was entered into before the construction that provided for the exclusive possession of the units that were transferred to the stratum unit holder. Accordingly, you are entitled to roll-over relief.
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