Edited version of private ruling

Authorisation Number: 1011756878228

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Ruling

Subject: CGT - cost base

Question

Where different assets are contributed by each party, how is the cost base of each of the townhouses to be retained under the joint venture agreement calculated?

Answer

The cost base of each town house is determined according to the money and the value of land given by you to acquire an interest in the asset and any other costs associated with the development and sale of the townhouses that qualify under the five elements of the cost base.

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The ruling involves a taxpayer and a fixed unit trust (the trust). The trust trades as a property developer.

The taxpayer and the trust are proposing to enter into a joint venture to undertake a development of number townhouses.

The taxpayer owns property that is used for residential rental. The property was acquired after 1985. The property is to be used in the joint venture. An estimation of the market value of the property was provided. Buildings on the property will be demolished to make way for the development of the townhouses.

After completion the townhouses will be strata titled.

An estimation of the total development cost was provided. The trust will undertake the development of the townhouses and be responsible for all aspects of the development including:

· Paying for and arranging for obtaining Development Approval

· Organising finance for construction

· Organising, paying for and supervising construction

All construction risk shall be borne by the trust.

The taxpayer will supply the land and will also pay a sum to the trust upon receipt by the trust of the first progress claim by the builder as a contribution towards costs.

The taxpayer's involvement will be limited to the above and allowing the land to be used as security for borrowing by the trust.

The output of the project for the taxpayer will be a number of townhouses to be retained as long term investments.

The output of the project for the trust will be a number of townhouses intended to be sold or transferred to the after the strata scheme is established.

The taxpayer will remain the registered owner of the land until settlement of any contracts of sale or transfer to the trust, which would occur after completion of the project.

You provided an undated draft copy of the joint venture agreement between the taxpayer and the trust which forms part of the ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 Section 112-25

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 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

Cost base of a CGT asset

Subdivision 110-A of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the cost base rules for CGT assets. The cost base of a CGT asset consists of five elements:

Element 1 - the money you paid or are required to pay to acquire the asset, and the market value of any other property you gave, or are required to give, in respect of acquiring it.

Element 2 - incidental costs you incurred in acquiring the asset. These include:

· fees paid to a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser

· stamp duty or other similar duty

· costs of advertising or marketing to find a buyer

· search fees (such as fees to check land titles and similar fees), and

· borrowing expenses (such as loan application fees and mortgage discharge fees)

Note: You cannot include costs if you have claimed a tax deduction for them in any year, or, omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

Element 3 - if you acquired the asset after 21 August 1991, costs of owning the asset that you incurred, including:

· rates, land taxes and insurance premiums

· non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an assets value.

 

Note: You cannot include costs if you have claimed a tax deduction for them in any year, or omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

Element 4 -   Capital costs you incurred to increase or preserve the value of your asset, such as:

· costs of applying for zoning changes

· demolition costs, and

· construction costs

Element 5 - capital costs you incurred to establish, preserve or defend your ownership of, or rights to, your asset.

Strata title established - splitting of asset

Section 112-25 of the ITAA 1997 sets out the CGT rules for splitting a CGT asset. The split itself is not a CGT event. If an original land parcel is split into two or more blocks, and beneficial ownership of the original land parcel and each of the new blocks is retained, section 112-25 provides that each element of the cost base of the original asset (worked out at the time of the split) is apportioned in a reasonable way and included in the corresponding element of the cost base of each new asset.

Apportioning elements of the cost base

The Commissioner would accept any approach that is appropriate in the circumstances of the particular case, e.g. on an area basis or relative market value basis (Taxation Determination TD 97/3). Costs such as survey, legal fees and application fees should be apportioned in accordance with the methodology used to apportion the cost base of the land. Costs which relate solely to a particular lot (such as connection of electricity and water and construction costs) are attributable solely to the lot to which those costs relate.

Application to your situation

Under the joint venture agreement, once the strata scheme is established you will either undertake action to transfer the remaining townhouses to the trust or transfer proceeds from the sale of those townhouses to the trust. You will remain the registered owner of the land until after the establishment of the strata scheme.

The split CGT asset rules under section 112-25 of the ITAA 1997 apply. In working out the cost base of the townhouses to be retained you need to choose a method to apportion the cost base of the original land parcels between all of the townhouses on a reasonable basis. A reasonable apportionment of the original cost of the land can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case.

Expenditure on the development of the townhouses to be retained, such as construction and demolition costs, can only form part of the cost base of the assets to the extent the expenditure was incurred by you.