Edited version of private advice

Authorisation Number: 1051576536632

Date of advice: 10 September 2019

Ruling

Subject: Capital gains tax roll-over relief

Question 1

Are you entitled to the capital gains tax roll-over under section 124-190 of the Income Tax Assessment Act (ITAA 1997) 1997?

Answer

Yes

Question 2

Will the Commissioner allow further time as provided in paragraph 103-25(1)(b) of the Income Tax Assessment Act (ITAA 1997) for you to choose to apply the capital gain tax roll-over relief that arose in the 2015-16 financial year?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2020

The scheme commences on:

1 July 2015

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.

Company A is the trustee for the Trust (Trust).

By contract of Sale (Purchase Contract), the trustee for the Trust and Company B purchased a property (Site) for $X as tenants in common in equal shares.

By partition agreement (Partition Agreement), the Trust and Company B agreed to enter into a joint venture and:

1.     build X strata townhouses on the site (Townhouses);

2.     sell X of the Townhouses; and

3.     partition and retain the remaining two Townhouses, specifically:

(a)   the Trust was to retain Townhouse 3; and

(b)   Company B was to retain Townhouse 2

The parties carried out the project and, in accordance with their original intention:

·        by contract of Sale townhouse X was sold for $X (including GST);

·        by contract of Sale townhouse X was sold for $X (including GST);

·        by contract of Sale townhouse X was sold for $X (including GST);

·        by LPI transfer forms, the parties partitioned Townhouse 3 and 2, that is:

(a) the trustee of the Trust transferred 50% of Townhouse 2 to Company B (in return for the transfer of 50% of Townhouse 3 from Company A); and

(b) Company B transferred 50% of Townhouse 3 to the Trust (in return for the transfer of 50% of Townhouse 2 from the trustee of the Trust).

After the relevant transfers of the respective 50% interests in Townhouse 3 and 2 pursuant to the Partition Agreement:

·        the trustee of the Trust held 100% of Townhouse 3; and

·        Company B held 100% of Townhouse 2,

(in accordance with the parties original intention and the Partition Agreement).

Both the Trust and Company B still hold their Townhouses. That is, the Trust owns Townhouse 3 and Company B owns Townhouse 2.

The Company and Trust respectively amended their returns as a result of an audit.

The Company and the Trust have indicated that they hold Townhouses 2 and 3 on capital account.

The disposal of their respective 50% interest pursuant to the Partition Agreement triggered CGT event A1, the parties have submitted that CGT rollover relief applied (or would have applied were the parties been advised to make the relevant choice at the time they completed the 2016 tax returns).

The Company and trustee of the Trust still own and rent out their Townhouses.

The partition agreement indicates that the Company and Trust have the right to exclusive occupation of their townhouses.

The partition agreement specifically states, that the Trust is entitled to Townhouse 3 for its sole and absolute benefit and the Company is entitled to Townhouse 2 for its sole and absolute benefit.

Pursuant to a clause of the Partition Agreement, the trustee of the Trust and the Company respectively had sole and exclusively rights to 'their' Townhouse, including but not limited to the exclusive right to occupy them.

The Trustee of the Trust and the Company had separate tax agents, neither of whom understood the way in which partitions operate and therefore, neither of them made the parties' aware of either:

·        the relevant CGT roll-over relief; or

·        the need to make the appropriate choice in their respective tax returns.

Neither the parties nor their original taxation advisers turned their minds to the relevant CGT rollover relief as they were not aware of its existence and did not appreciate the significance of the different manner or character in which Townhouse 2 and 3 were held compared to the for-sale Townhouses.

The 201X income tax returns were lodged in the 201X-1X income tax year. The capital gain that was included was approximately $X for both the Company and Trust.

This project was the first partition agreement carried out by the Trustee of the Trust and the Company.

The key persons behind the Trustee of the Trust and the Company did not have any personal knowledge of the tax issues on partition and the two entities separately engaged tax agents to provide appropriate assistance in this regard.

The Trustee of the Trust and the Company are now aware of the various tax issues relating to partitions, how they work and have engaged a tax agent with significant experience in the area.

The Trustee of the Trust and Company have requested that the Commissioner allow it to choose to apply the CGT rollover relief outlined under section 124-190 of the Income Tax Assessment Act (ITAA) 1997 and allow the choice to be made after the lodgement date for the 201X income tax return.

Relevant legislative provisions

Section 160ZZPG Income Tax Assessment Act 1936

Section 118-42 Income Tax Assessment Act 1997

Section 124-190 Income Tax Assessment Act 1997

Section 124-10 Income Tax Assessment Act 1997

TR 97/4

Reasons for decision

These reasons for decision accompany the Notice of private ruling for

The Company.

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

Summary

It is accepted that Townhouses 2 and 3 are on capital account.

It is accepted that the requirements for access to the CGT roll-over under section 124-190 of the ITAA 1997 have been met.

Furthermore, an extension of time for you to make the choice to apply the roll-over under section 124-190 ITAA 1997 until 31 December 2019 has been allowed. You can amend the 201X income tax returns accordingly.

Detailed reasoning

Section 160ZZPG of the Income Tax Assessment Act 1936 (ITAA 1936) contained roll-over relief which applied where land on which a building or buildings were erected was subdivided into strata units or strata units and common property and immediately before and after the subdivision a taxpayer had a particular asset in relation to the land. Section 160ZZPG of the ITAA 1936 was repealed and replaced by sections 118-42 and 124-190 of the ITAA 1997.

Section 118-42 of the ITAA 1997 states that 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.

Under section 124-190 of the ITAA 1997 a roll-over is available if:

(a) you own property (the 'original asset') that gives you a right to occupy a unit in a building;

(b) the building's owner subdivides it into stratum units; and

(c) the owner transfers to you the stratum unit (the 'new asset') that corresponds to the unit you had the right to occupy just before the subdivision.

The cost base of the new stratum unit is worked out according to subsections 124-190(2) and 124-10(3) of the ITAA 1997.

Essentially the operation of sections 118-42, 124-190 and 124-10 of the ITAA 1997 results in the CGT attributes of the 'original asset' (the property from which the right to occupy was derived) being rolled over to the 'new asset' (the stratum unit).

That is, the first element of the cost base of the new stratum unit includes the cost base of the original asset.

Taxation Ruling TR 97/4 Income tax: capital gains: roll-over relief for buildings subdivided under strata title law into stratum units and common property 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.

Roll-over relief is only available 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.

In your case, the Company and Trust legally own, as tenants in common, the Property which was subdivided into stratum units. Prior to the conversion process the company and trust entered into an agreement that sets out which entities hold rights to occupy particular units in the building. After the conversion the ownership of each unit will be held by the Company and Trust which held the right to occupy the unit immediately prior to the strata title conversion. That is, The Trust will retain Townhouse 3 and the Company will retain Townhouse 2.

It is accepted that the requirements for access to the CGT roll-over under sections 118-42 and 124-190 of the ITAA 1997 have been met.

Question 2

The Commissioner will allow further time to make the choice to utilise the roll-over as both parties and their representatives did not know at the time of lodging the relevant tax returns that they could make this choice.

A misunderstanding and oversight by you and your tax advisor meant that the capital gain resulting from the CGT event and the eligibility of the roll-over provision was not considered. Therefore, you effectively did not make the choice at the time the 201X income tax return was lodged.

We consider this to be an acceptable explanation for the period of extension required. There would be no prejudice to the Commissioner or unsettling of people by allowing the extension. There is no mischief involved. The Commissioner considers it fair and equitable in these circumstances to exercise the discretion.

An extension of time for you to make the choice to apply the roll-over under section 124-190 ITAA 1997 has been allowed. You will need to amend the 201X income tax returns accordingly.

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