Edited version of private advice

Authorisation Number: 1052240378890

Date of advice: 10 April 2024

Ruling

Subject: CGT asset - cost base

Question

Is your freehold interest in the land a pre-CGT interest?

Answer

No.

Question

Is the cost base of the X% interest in the land you sold in 20XX the market value at the time the land converted to freehold in 20XX?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You were initially granted a sub-lease (X% ownership) over land by a company (the company) prior to 19XX. This was one of the parcels of land the company had a Crown lease over and leased to various sub-lessees.

In or around 19XX, the company sought to have its Crown lease extended. It was told by the government that the permission of all XX sub-lessees would be required for a new Crown lease to be issued with the extended term. The sub-lessees agreed and upon the issue of the new Crown lease and the payment of $X, each sub-lessee entered a new sub-lease.

You were granted a sub-lease in 19XX.

In the 19XX sub-lease, the agreement provided that the sublessor shall first offer to the sublessee the right to purchase an estate in fee simple in the lot at a price of $X plus the costs expended by the sublessor in seeking approval and obtaining separate certificate of title.

There was considerable dispute whereby the company tried to avoid its obligations when it obtained the estate in fee simple to the land. Ultimately, however, the company was obliged to sub-divide the land and each sub-lessee was able to exercise its rights to acquire the lot which was the subject of its sub-lease.

During the 20XX income year, you agreed to include 3 related individuals as partners in your business, meaning X% of your X% interest in the 19XX sub-lease.

You granted X% of your X% part ownership interest to the three related individuals, so that each of them held a X% leasehold interest in the land.

At this time only your name was on the lease relating to your X%.

The Crown lease converted to freehold title in 20XX. When the Crown lease was converted to freehold title, the sub-lessees exercised their right to acquire the land and in 20XX the new certificate of title was issued to you and the 3 related individuals.

You paid $X for costs associated with the subdivision approvals.

In 20XX you and the related individuals who are the owners of the freehold interest entered a contract for the sale of the land and completion of the sale has occurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 110-25(1)

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 section 124-575

Income Tax Assessment Act 1997 section 124-580

Income Tax Assessment Act 1936 section 160ZWA

Income Tax Assessment Act 1936 subsection 160ZWA(5)

Reasons for decision

Question 1

Section 124-575 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a compulsory replacement asset roll-over happens if:

(a)  you hold one or more assets that are Crown leases over land, and

(b)  the original right expires or you surrender it, and

(c)   you are granted an estate in fee simple or a new Crown lease over the land (or both), and

(d)  the new right relates to the same land as the original right.

For Crown leases which were extended or converted to freehold prior to 1997, section 160ZWA of the Income Tax Assessment Act 1936 (ITAA 1936) applies the same way that section 125-575 of the ITAA 1997 applies.

Subsection 160ZWA(5) of the ITAA 1936 provides if a freehold interest relates wholly to land to which a pre-20 September 1985 original Crown lease related, you shall be taken to have acquired the freehold interest before 20 September 1985.

A Crown lease is defined in section 124-580 of the ITAA 1997 as:

(a)  a lease of land granted by the Crown under an Australian law (other than the common law), or

(b)  a similar lease granted under a foreign law.

Application to the circumstances

Prior to 19XX, you entered into a sub-lease with a company who had a Crown lease over land. The sub-lease was extended in 19XX and under the terms of the sub-lease the sub-lessor was obliged to first offer to the sublessee the right to purchase an estate in fee simple (also known as freehold).

A sub-lease does not fall within the definition of a Crown lease. The rollover available under subsection 160ZWA(5) is only available to a Crown lease which has been extended or converted to freehold. As the rollover does not apply to a sub-lease, the land you acquired in 20XX does not retain its pre-CGT status.

Question 2

Subsection 110-25(1) of the ITAA 1997 provides that the cost base of a CGT asset consists of 5 elements:

•         the money you paid to acquire the asset

•         incidental costs

•         costs of owning the CGT asset

•         capital costs to increase or preserve the value of your asset

•         capital costs of preserving or defending your title or rights to your CGT asset

Under subsection 112-20(1) of the ITAA 1997 the first element of your cost base of a CGT asset you acquire from another entity is its market value if:

(a)  you did not incur expenditure to acquire it

(b)  some or all of the expenditure you incurred to acquire it cannot be valued, or

(c)  you did not deal at arm's length with the other entity in connection with the acquisition.

Application to the circumstances

You acquired the freehold land from an unrelated company and your dealings were at arm's length. You incurred costs totalling $X. As the land was acquired from an unrelated company and you incurred expenditure to acquire it, the cost base of the asset is not the market value. The cost base will consist of the costs incurred to acquire the land in accordance with subsection 110-25(1) of the ITAA 1997.

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