Edited version of private advice

Authorisation Number: 1052227395673

Date of advice: 29 February 2024

Ruling

Subject: CGT - exemptions and rollover relief

Question 1

Does a Capital Gains Tax (CGT) exemption apply to you upon partitioning of the property?

Answer

No.

Question 2

Does CGT rollover relief apply to you upon partitioning of the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 19XX you (Person A) and your sibling (Person B) purchased a property (Property A).

The original Title shows that the Property A was held as tenants in common with the following ownership interest:

•         Person A held a 1/3 share of the legal interest in Property A.

•         Person B held a 2/3 share of the legal interest in Property A.

In 19XX, Property A was the primary residence for Person A and Person B.

In 20XX, development was undertaken, and the original dwelling was demolished.

In 20XX, the construction of 2 townhouses was completed.

The Property A address was retained for the townhouse that became the main residence of Person B.

The second townhouse is your property (Property B).

Property B was your main residence.

In 20XX, you moved to another property, which became your new main residence.

Property B was utilised by you for rent and was held as an investment property.

On XX XX 20XX, the Plan of Subdivision was registered.

In XX 20XX, a Partition Agreement, Plan of Subdivision, and Transfers of Land were executed.

On XX XX 20XX, the Land Title transfer was registered.

Titles for each property were separated to reflect:

•         Property A owned 100% by Person B

•         Property B owned 100% by Person A.

The Partition Agreement details that each party (Person A and Person B) accepts the title of the other without making any requisitions or other enquiries of the other in respect of title.

In accordance with the Partition Agreement, you disposed of your 1/3 interest in Property A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-142

Income Tax Assessment Act 1997 section 124-90

Reasons for decision

Detailed reasoning

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens.

Under section 104-10 a CGT event A1 occurs when there is a change in legal ownership of a CGT asset.

Subsection 104-10(3) of the ITAA 1997 provides that the time of the CGT event A1 happens when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs.

The time when a contract is entered into is the time when it comes into existence for general law purposes.

Subdivision and partition of property

Where land is held by co-owners and they elect to subdivide it and retain their respective interests as co-owners in each of the subdivided lots, there will be no CGT event and no disposal. It is at the time of the disposal that any capital gain or capital loss may arise, such as the future transfer or disposal of the ownership interest in a subdivided lot.

If a subdivision is carried out in conjunction with a partition of the property, with the result that each of the previous co-owners becomes the sole owner of one or more of the subdivided lots, then there will at the time of the partition be:

a)    A CGT event happening in relation to interests of the previous co-owners in each of the subdivided lots that they do not become the sole owners of after the partition.

b)    Acquisitions by each of the previous co-owners who become sole owners of one or more of the subdivided lots of the interests of all other previous co-owners in those subdivided lots.

The CGT implications of joint owners subdividing land and each taking 100% ownership are considered in Taxation Determination (TD) 92/148 Income tax: capital gains: is there a disposal and an acquisition where joint owners of a block of land subdivide that land into two smaller blocks with each owning one block? The Commissioner's view is that the result of the transaction whereby each owner of subdivided land now has sole ownership of an individual block, is the disposal and acquisition of ownership interests in the blocks by the co- owners.

The principles contained in TD 92/148 are supported by the comments made by Senior Member McCabe in Johnson v. FC of T 2007 ATC 2161 (Johnson) at paragraphs 15 and 16:

•         15.... Dividing the parcel in two for the purposes of a transfer to each joint owner effectively requires those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they are acquiring. It is as if the CGT assets contained in each share have to be unpacked and redistributed so that the taxpayer ends up holding half the number of shares in his or her own right- and those shares do not contain any CGT assets belonging to the other (former) joint owner.

•         16. This rearrangement and reallocation of the ownership of CGT assets constitutes a disposition of the CGT asset, and is therefore a CGT event: s 104-10. Subject to the legislation, tax is levied on the capital proceeds from a CGT event less the cost base of the asset. The capital proceeds are the sum of the money received in respect of the transaction (no money changed hands in this case) and the market value of any other property received (in this case, the market value of the interest acquired in the shares): s 116-20.

The Commissioner considers that, although the comments made by Senior Member McCabe in Johnson were in relation to the division of jointly owned shares, the comments expressed in that case can also relate to the reallocation of the ownership interests in jointly held subdivided lots, as being viewed as a CGT event A1 for the owner transferring their ownership interest to the other joint owner.

For CGT purposes, where one co-owner acquires the interest of the other co-owner in land, the taxpayer would have full ownership of the land derived from the acquisition of the two interests, being the co-owner's original ownership interest and the ownership interest acquired from the other co-owner. Taxation Determination TD 2000/31 - Income tax: capital gains: if you own an interest in a CGT asset and you acquire another interest in that asset, do the interests remain separate CGT assets for capital gains purposes or do they become a single asset? outlines that the interests remain separate CGT assets for CGT purposes. This means that when a CGT event happens to the two interests, such as a future disposal, there will be a separate date of acquisition and a separate cost base for each interest, and capital proceeds will be determined separately for each interest.

CGT exemption

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. Generally, you can disregard a capital gain or capital loss made on the disposal of a property that is your main residence if:

•         The property was your home for the whole period you owned it

•         The property was not used to produce assessable income while you were living there, and

•         Any land on which the dwelling is situation is not more than two hectares.

Section 118-42 of the ITAA 1997 covers exemptions in relation to capital gains and losses. This section states that a capital gain or capital loss you make from transferring the unit is disregarded 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.

CGT rollover relief

Under section 124-90 of the ITAA 1997, you can choose to obtain a rollover if:

(a)  You own property that gives you a right to occupy a unit in a building; and

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

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

Application to your circumstances

You jointly acquired the Property in which you had a 1/3 share of the ownership interest. You have subdivided the Property into two lots and transferred your ownership interest in one of the subdivided lots to Person B, you each solely own one of the subdivided lots in accordance with the Partition Agreement.

The rearrangement and reallocation of the ownership interest constitutes a disposal of the CGT asset and is therefore a CGT event under s104-10 of the ITAA 1997. The capital proceeds are the sum of the money received (in this case, the market value of the interest acquired) in respect of the transaction. An owner that disposes of their interest in the previously jointly owned property will make a capital gain or capital loss from the partition by way of a CGT event A1 happening.

It is viewed that the Partition Agreement is a contract and the conditions contained in it indicated the obligations you were required to perform as part of the Partition Agreement. There was a mutual intention by both co-owners to create a legal relationship and for it to have legal effect. All the actions following the date the Partition Agreement was entered into were in relation to you each obtaining the sole ownership in one subdivided lot.

Therefore, it is viewed that CGT event A1 occurred when you entered into the Partition Deed, and not when the title of one of the subdivided lots is transferred to you.

Any capital gain or capital loss made on the disposal of your ownership interest in the subdivided lot transferred in accordance with the Partition Agreement is counted towards the calculation of your net capital gain. The CGT provisions will apply to you when you entered into the Partition Agreement and any capital gain or capital loss made on the disposal of your ownership interest in one of the subdivided lots to the other is included in your assessable income.

In your case, you owned the land that has been subdivided and transferred property to an entity who had the right to occupy it just before the subdivision. But you did not subdivide the building into stratum units. There is no CGT exemption applicable to your circumstances.

Your circumstances do not meet the requirements to obtain rollover relief. A CGT A1 disposal event happened on the disposal of your ownership interest in Property B.

While this could be viewed as a property for property transfer, for CGT purposes the capital proceeds you received as a result of the transfer of your ownership interest in one of the subdivided lots to your brother will be the market value of the ownership interest in the subdivided lot transferred under the market value substitution rules contained in section 116-20 of the ITAA 1997, as you did not deal with each other at arm's length in relation to the transfer of your respective ownership interests.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).