Edited version of private advice

Authorisation Number: 1051825845637

Date of advice: 9 April 2021

Ruling

Subject: CGT treatment for land, buildings and capital improvements

Question 1

If the Relevant Land owned by the Rulee is sold, can any capital gain or capital loss be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997, provided the Relevant Land does not stop being a pre-CGT asset under Division 149 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Will the Relevant Land stop being a pre-CGT asset for the purpose of Division 149 of the Income Tax Assessment Act 1997?

Answer

No

Question 3

Are the buildings and structures constructed on the Relevant Land by the Rulee taken to be separate CGT assets under subsection 108-55(2) of the Income Tax Assessment Act 1997 if there is a disposal of the Relevant Land?

Answer

Yes

Question 4

Will another capital improvement made to the Relevant Land (not related to any other capital improvement to the Relevant Land) be taken to be a separate CGT asset if its cost base (assuming it were a separate CGT asset) when a CGT event happens in relation to the Relevant Land is:

a)    more than the improvement threshold for the income year in which the event happened; and

b)    more than 5% of the capital proceeds from the event?

Answer

Yes

Question 5

Will other capital improvements made to the Relevant Land that are related to each other be taken to be a separate CGT asset if the total of their cost bases (assuming each one were a separate CGT asset) when a CGT event happens in relation to the Relevant Land is:

a)    more than the improvement threshold for the income year in which the event happened; and

b)    more than 5% of the capital proceeds from the event?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Rulee was established by a Trust Deed before 20 September 1985.

The Rulee is a discretionary trust, the beneficiaries include:

a)    person A, her children and grandchildren

b)    the spouses of person A, her children and grandchildren

c)    any corporation the shares in which are held by or for the benefit of a beneficiary referred to in paragraphs (a) or (b) above, and

d)    any trust of which a beneficiary referred to in paragraphs (a) or (b) above is also a beneficiary.

The Trust Deed has been amended three times:

•         twice, varying the Trustee's rights to apply the Rulee's assets to discharge certain liabilities, and varying the Trustee's indemnity rights for those liabilities

•         once, varying the vesting date from 31 December 20XX to 30 June 20XX.

The Trust/Rulee has always been administered for the benefit of the family of person A.

The Trustee will not make any distributions of the Rulee's income or capital to any entity who is not a beneficiary, as currently defined by the Trust Deed.

Apart from the three amendments just mentioned, there have not been any other amendments to the Trust Deed.

The Rulee acquired the Relevant Land before 20 September 1985.

The Rulee developed the Relevant Land by constructing buildings and capital improvements.

These buildings and capital improvements began to be leased to third parties starting from 20XX.

The Rulee started constructing buildings and capital improvements on the Relevant Land around one year before that. The Rulee continued to develop the land by constructing additional buildings and capital improvements after this time. None of the buildings were, or will be, constructed under a contract which was entered into before 20 September 1985.

The Rulee will continue to develop the balance of the Relevant Land over a period of 10 years or more (after the date of this ruling application).

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-55 of the Income Tax Assessment Act 1997

Section 108-70 of the Income Tax Assessment Act 1997

Section 149-10 of the Income Tax Assessment Act 1997

Section 149-15 of the Income Tax Assessment Act 1997

Section 149-30 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

If the Relevant Land owned by the Rulee is sold, can any capital gain or capital loss be disregarded under paragraph 104-10(5)(a), provided the Relevant Land does not stop being a pre-CGT asset under Division 149?

Summary

Yes. The Rulee can disregard any capital gain or capital loss under paragraph 104-10(5)(a), provided Division 149 does not apply.

Detailed reasoning

CGT event A1 happens under section 104-10 if you dispose of a CGT asset. However, paragraph 104-10(5)(a) allows you to disregard a capital gain or capital loss if you acquired the asset before 20 September 1985.

The Rulee acquired the Relevant Land before 20 September 1985, so the Rulee can disregard any capital gain or capital loss from any sale of the Relevant Land, unless Division 149 applies.

Division 149 is addressed in Question 2.

Question 2

Will the Relevant Land stop being a pre-CGT asset for the purpose of Division 149?

Summary

No. The Relevant Land will not stop being a pre-CGT asset under Division 149.

Detailed reasoning

Broadly, Division 149 prevents assets being treated as pre-CGT assets if there is a change in their majority underlying ownership.

Section 149-10 says a CGT asset is a pre-CGT asset if the entity owning it last acquired the asset before 20 September 1985, unless it stops being a pre-CGT asset under Division 149, or certain repealed provisions.

Subsection 149-30(1) says an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. The effect of subsection 149-30(2) is that an asset will not stop being a pre-CGT asset under subsection 149-30(1) if the Commissioner is satisfied, or thinks it reasonable to assume, that there has not been a change in majority underlying interests in the asset.

If an asset stops being a pre-CGT asset under subsection 149-30(1), then other CGT provisions will apply to the asset as if the relevant entity acquired it at the time it ceased to be a pre-CGT asset: subsection 149-30(1A).

Subsection 149-15(1) says majority underlying interests in an asset consist of more than 50% of the beneficial interests that ultimate owners have (directly or indirectly) in the asset and any ordinary income that may be derived from that asset.

Ultimate owners are defined to include individuals: paragraph 149-15(3)(a). Trustees (or trust estates) are not listed as a category of ultimate owner in subsection 149-15(3).

Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340) explains the ATO's approach to determining whether there has been a change in the majority underlying interests in assets held by discretionary trusts. IT 2340 refers to the repealed section 160ZZS of the Income Tax Assessment Act 1936, which had a similar effect to Division 149.

Broadly, IT 2340 says that:

•         when determining whether there has been a change in the majority underlying interests in assets held by discretionary trusts, the way in which trustees exercise their powers is relevant: paragraph 5

•         where a trustee continues to administer a trust for the benefit of members of a particular family, the Commissioner would find it reasonable to assume that the majority underlying interests in the trust assets have not changed: paragraphs 6 and 7

•         the trust's assets may lose their pre-CGT status where members of a new family are substituted as recipients of distributions in place of former recipients (either by the exercise of discretionary powers, or amendment of the trust deed): paragraph 8.

Following this approach, the Commissioner would find it reasonable to assume that the majority underlying interests in the Rulee's assets have not changed, because:

•         the Rulee is a discretionary trust, which has always been administered for the benefit of person A's family

•         the current beneficiaries are within person A's family group

•         the Trustee will not make any distributions of the Rulee's income or capital to entities who are not beneficiaries, as currently defined by the Trust Deed

•         previous amendments to the Trust Deed have merely varied the vesting date and the Trustee's liability and indemnity rights: they have not introduced new beneficiaries or permitted distributions to entities who are not beneficiaries

•         the Trust Deed will not be amended to allow distributions of the Rulee's income or capital to entities who are not current beneficiaries.

Since the Commissioner would find it reasonable to assume that the majority underlying interests have been maintained, Division 149 will not apply. The land will not stop being a pre-CGT asset.

Question 3

Are the buildings and structures constructed on the Relevant Land by the Rulee taken to be separate CGT assets under subsection 108-55(2) if there is a disposal of the Relevant Land?

Summary

Yes. The buildings constructed on the Relevant Land will be taken to be separate CGT assets under subsection 108-55(2).

Detailed reasoning

Subsection 108-55(2) says a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if:

a)    you entered into a contract for the construction on or after that day; or

b)    if there is no contract - the construction started on or after that day.

The Relevant Land was acquired before 20 September 1985, and construction for the buildings began about one year before they began to be leased to third parties in 2009. No buildings were, or will be, constructed under a contract entered into before 20 September 1985. Therefore, subsection 108-55(2) applies to treat the buildings and structures constructed on the Relevant Land as separate CGT assets to the land.

Question 4

Will another capital improvement made to the Relevant Land (not related to any other capital improvement to the Relevant Land) be taken to be a separate CGT asset if its cost base (assuming it were a separate CGT asset) when a CGT event happens in relation to the Relevant Land is:

a)    more than the improvement threshold for the income year in which the event happened; and

b)    more than 5% of the capital proceeds from the event?

Summary

Yes. Any future capital improvements made to the Relevant Land, which are unrelated to any other capital improvements to the Relevant Land, will be taken to be a separate CGT asset in the circumstances specified in the question.

Detailed reasoning

Subsection 108-70(2) says that a capital improvement to a CGT asset that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base (assuming it were a separate CGT asset) when a CGT event happens (except one that happens because of your death) in relation to the original asset is:

a)    more than the improvement threshold for the income year in which the event happened; and

b)    more than 5% of the capital proceeds from the event.

The Rulee acquired the Relevant Land before 20 September 1985. The question is confined to capital improvements which:

•         are unrelated to any other capital improvements to the Relevant Land

•         have a cost base which is more than the relevant improvement threshold, and is more than 5% of the capital proceeds from any CGT event which happens to the Relevant Land.

The Rulee is a Trust Estate, not an individual, so the exception for CGT events happening because of death is not relevant.

Subsection 108-70(2) will apply to deem capital improvements to the Relevant Land (covered by this question) to be separate assets to the Relevant Land.

Question 5

Will other capital improvements made to the Relevant Land that are related to each other be taken to be a separate CGT asset if the total of their cost bases (assuming each one were a separate CGT asset) when a CGT event happens in relation to the Relevant Land is:

a)    more than the improvement threshold for the income year in which the event happened; and

b)    more than 5% of the capital proceeds from the event?

Summary

Yes. Any future capital improvements made to the Relevant Land, which are related to other capital improvements to the Relevant Land, will be taken to be a separate CGT asset in the circumstances specified in the question.

Detailed reasoning

Subsection 108-70(3) says that capital improvements to a CGT asset that you acquired before 20 September 1985 that are related to each other are taken to be a separate CGT asset if the total of their cost bases (assuming each were a separate CGT asset) when a CGT event happens in relation to the original asset is:

a)    more than the improvement threshold for the income year in which the event happened; and

b)    more than 5% of the capital proceeds from the event.

The Rulee acquired the Relevant Land before 20 September 1985. The question is confined to capital improvements on the Relevant Land which:

•         are related to each other

•         have a cost base which is more than the relevant improvement threshold, and is more than 5% of the capital proceeds from any CGT event which happens to the Relevant Land.

Subsection 108-70(3) will apply to deem capital improvements to the Relevant Land (covered by this question) to be separate assets to the Relevant Land.

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