Edited version of private ruling

Authorisation Number: 1011630677590

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Ruling

Subject: Income tax - Capital gains tax - roll-over

Question 1

Is capital gains tax rollover relief available in respect of the strata title division under Part 3-3 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

April 2010

Relevant facts and circumstances

You are a partner in a partnership ('the partnership').

The partnership purchased a property. The title to this property was registered as tenants in common in equal shares between the partners.

The partnership demolished the existing dwelling on the property and constructed four town houses on the land. The town houses commenced to be rented upon completion of the building works.

You have stated that the intention at the date of purchase and at all times was for the partnership to demolish the existing dwelling and construct four townhouses for rental.

You applied to transfer the title of two residential units out of the four residential units held as tenants in common between the partners absolutely. The application was granted and the town houses were subdivided into stratum units whereby each partner held two of the town houses absolutely.

You were issued with titles to two units out of the four residential units.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-42

Income Tax Assessment Act 1997 Division 124

Income Tax Assessment Act 1997 section 124-190

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

Income Tax Assessment Act 1936 section 160ZZPG

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, go to our website 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

Summary

Roll-over relief will not be available under section 124-190 of the Income Tax Assessment Act 1997 (ITAA 1997) as the right you held prior to conversion to strata title was an occupancy right in relation to all the land and buildings rather than a right to occupy specific townhouses. No other roll-over relief provisions in the ITAA 1997 apply to strata title conversions.

Detailed reasoning

The ITAA 1997 provides the availability of two capital gains tax (CGT) concessions in respect of strata title conversions: an exemption is available to the owner of the land in section 118-42 of the ITAA 1997 and optional roll-over relief is available to the persons entitled to occupy the units in section 124-190 of the ITAA 1997.

Section 160ZZPG of the Income Tax Assessment Act 1936 (ITAA 1936), the equivalent former provision of sections 118-42 and 124-190 of the ITAA 1997, contained optional 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 has now been repealed and ceased to apply from the 1998-99 income year.

The application of section 160ZZPG of the ITAA 1936 to tenancy in common arrangements having collateral agreements granting participants exclusive occupancy, use and enjoyment rights over particular stratum units was considered by the Commissioner in Taxation Ruling TR 97/4 Income tax: roll-over relief for buildings subdivided under strata title law into stratum units and common property. Although the ruling was issued in relation to the ITAA 1936 provisions, the principles in the ruling still apply to the exemption and roll-over relief provisions in the ITAA 1997.

Roll-over relief on a strata title conversion of a building is provided in subdivision 124-D of the ITAA 1997 to a person whose right to occupy a unit or units in a building is replaced by ownership of a stratum unit corresponding to the former unit.

Under subsection 124-190(1) of the ITAA 1997 a taxpayer may choose for the roll-over to apply where they have disposed of their right to occupy a unit and they have received title to a stratum unit corresponding to the unit which they had the right to occupy immediately before the conversion.

In TR 97/4 the Commissioner explains that if tenants in common subdivide a building and transfer their interest 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.

In accordance with paragraphs 43 to 48 of TR 97/4, which consider the CGT implications of strata title subdivisions 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 on any disposal which occurs as a result of that subdivision and transfer. A disposal occurs because the transfer of interests between tenants in common amount to a change in legal and beneficial ownership of those interests.

Roll-over relief is available under section 124-190 of the ITAA 1997 for such disposals if before the conversion process the tenant in common owns property that gives a right to occupy a unit in a building.

Prior to conversion tenants in common have, in the absence of an agreement or understanding granting each tenant in common exclusive occupation (including an exclusive right of possession) of a particular stratum unit, occupancy rights in relation to the whole building, rather than occupancy rights in relation to a particular stratum unit.

In the absence of such an agreement or understanding, roll-over under section 124-190 of the ITAA 1997 is not available as the requirement that there existed a right of occupancy before the subdivision and transfer process took place could not be satisfied by the tenants in common.

Application to your circumstances

As the title of the property was registered as tenants in common in equal shares between the partners upon its purchase and as the intention was always to construct four townhouses for rental, prior to conversion to strata title the right you held as a tenant in common was a right of occupancy in relation to the entire land and buildings.

One of the conditions in section 124-190 of the ITAA 1997 for roll-over to apply is that prior to conversion to strata title you own property that gives you a right to occupy a unit in a building.

As the right you held prior to conversion to strata title was an occupancy right in relation to all the land and buildings rather than a right to occupy specific townhouses, roll-over relief will not be available under section 124-190 of the ITAA 1997. There are no other roll-over relief provisions in the ITAA 1997 that apply to strata title conversions.

Section 160ZZPG of the ITAA 1936 no longer applies. There are no other roll-over relief provisions in the ITAA 1936 apply to strata title conversions.