Edited version of private ruling

Authorisation Number: 1011599060851

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Ruling

Subject: Capital Gains Tax (CGT)

Will section 118-42 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard capital gains or capital losses arising from the transfer of each unit to the tenant in common who has the right to occupy it?

Yes.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2010

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.

You are the owners as tenants in common of a property. It consists of a number of units, one of which is physically occupied by two of the applicants. You wish to enter into an agreement. The agreement is intended to provide a mechanism for you to both have exclusive rights to occupy and lease out the units, and to provide a means to convert the building to strata title and to share expenses in the meantime.

You have provided a copy of the agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-42

Income Tax Assessment Act 1997 Section 124-190(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

CGT implications for tenants in common

If tenants in common subdivide a building and transfer their interests so that each tenant in common becomes a registered proprietor of a stratum unit, 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 is available in respect of these disposals and acquisitions if a tenant in common satisfies the criteria in section 124-190(1) of the ITAA 1997. 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 stratum 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 stratum 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.

Example 3 - conversion of a duplex owned by tenants in common quoted from Taxation Ruling 97/4

Ms Land (L) and Mr Develop (D) bought a new duplex building in Brisbane in July 1987 as tenants in common in equal shares. They entered into a written agreement which gave D exclusive occupation of unit 1 and L exclusive occupation of unit 2.

In March 1989, D and L agree to convert the property into stratum units. They register a strata plan of subdivision. After subdivision, L and D own each unit as tenants in common. On 10 June 1989 (a short time after subdivision is complete), D transfers his half interest in unit 2 to L and L transfers her half interest in unit 1 to D.

If L and D each elect that subsection 160ZZPG(2) applies, they are not liable for CGT on any disposal of land or buildings which occurs as a result of the subdivision or transfers. Further, L and D are each treated as having paid for their stratum units an amount equal to the relevant cost base attributable to their interests in the duplex as tenants in common as at 10 June 1989 (i.e., the date at which the transfers occurred).

Right to occupy

The taxpayer must own property which gives the taxpayer a right to occupy a unit in the relevant building. Where the occupants of the building own the building as tenants in common - the holding of a tenancy in common interest in the land and building. The taxpayer need not actually occupy the lot or unit, it is enough that the taxpayer has the right to occupy the lot or unit. The lot or unit may, for example, be sublet to short-term tenants.

Section 118-42 of the ITAA 1997 applies to the original owner of the land on which the building is situated if, as a result of the strata conversion, a unit is transferred to the same person who had the right to occupy it before the conversion. It is complemented by section 124-190 of the ITAA 1997 which provides optional roll-over relief for the owner of the stratum units immediately after the conversion.

Section 124-190(1) of the ITAA 1997 states you can choose to obtain a roll-over if:

· you own property that gives you a right to occupy a unit in a building, and

· the building's owner subdivides it into stratum units, and

· the owner transfers to you the stratum unit that corresponds to the unit you had the right to occupy just before the subdivision.

Roll-over relief under section 124-190 of the ITAA 1997 is not automatic. The taxpayer must make a conscious choice to obtain the roll-over. If the choice is not made, then a capital gain or capital loss may be crystallised in the income year in which the stratum unit is transferred to the taxpayer.

The choice must be made by the day on which the taxpayer lodges its return for the income year in which the relevant CGT event occurs, or within any further time allowed by the Commissioner. The way the taxpayer prepares the tax return is sufficient evidence of whether a choice has been made.

In your case, you have prepared an agreement which amongst other things grants you both jointly and individually exclusive rights of possession of the units in the property. You propose to sign the deed and at a later date make application to convert the title of the building to strata title.

You currently own the property as tenants in common and have the right to occupy a unit in the building. To obtain roll-over relief you need to satisfy all of the conditions in section 118-42 of the ITAA 1997 and section 124-190(1) of the ITAA 1997 and make a choice to obtain the roll-over.