Edited version of private ruling

Authorisation Number: 1011802788124

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Ruling

Subject: Capital gains tax - cost base, strata title and pre and post CGT land

Question1:

Did you acquire part of your spouse's interest in the property B for its market value on date of signing the joint venture agreement?

Answer: Yes.

Question 2:

Will the strata apartments which are wholly situated on pre Capital Gains Tax (CGT) land consist of entirely pre-CGT cost base of land?

Answer: No.

Question 3:

Will the strata apartments which are wholly situated on post CGT land consist of an entirely post-CGT cost base of land?

Answer: No.

Question 4:

Will the strata apartments which encroaches both the pre CGT and post CGT portion of the land will have to be apportioned in relation to the amount of pre and post CGT land they are situated on?

Answer: Yes.

Question 5:

Is the capital gain or capital loss that arises to the extent that it relates to the pre-CGT component of the strata cost base disregarded?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2007

Relevant facts

You and your spouse jointly acquired a property (property A) prior to 20 September 1985, and it was used by your spouse for their business.

Your spouse acquired two adjoining properties (property B) after 20 September 1985, solely in your spouse's name. These properties were leased to tenants who used them as their workshop.

Early 2008, you and your spouse entered into a joint venture agreement (JVA) for the development of the property at property A and B.

Under the JVA your acquired an ownership interest in 4 Allen Street.

The parties to the JVA were:

· the developer

· the owners of the land, and

· the covenanter and director of the project.

You, your spouse and the developer agreed to enter into the JVA to construct a specified number of apartments, commercial spaces and retail spaces on the land.

The development will consist of three blocks (A, B & C)

Under the JVA you and spouse received the following:

· a specified number of apartments in Block B and Block C

· a specified number of retail spaces in Block B, and

· a specified number of commercial spaces in Block B.

The developer received the following:

· a specified number of apartments in Block A and Block C

· a specified number of retail spaces in Block A, and

· a specified number of commercial spaces in Block C.

The land attached to the strata apartments which you will retain will be comprised of both pre-CGT and post CGT land, comprising of large percentage of pre-CGT and a small percentage of post CGT.

Under the terms and conditions of the JVA, the developer would undertake to construct the project in accordance with the development consent. The developer then strata subdivided the property, and transferred the strata apartments to the joint venturers in accordance with Schedule B of the JVA.

Under the terms and conditions of the JVA, the developer at his discretion may choose to dispose of his proportional interest prior to the completion of the project.

Last year you requested and received a private ruling on the CGT consequences of transferring an ownership interest of property B to the developer.

You and your spouse have disposed of some of your apartments during this income tax year.

You have provided copies of documentation to support your application and these documents are to be read with and forms part of the scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 124-190

Income Tax Assessment Act 1997 Section 108-55

Reasons for decision

CGT event A1 happens if an individual disposes of a CGT asset, or interests in a CGT asset to another entity. The time of the event is when you enter into a contract or if there is no contract, when the change of ownership occurs.

Therefore, a CGT event A1 occurred when your spouse transferred an ownership interest in 4 Allen Street into your name on the signing of the JVA.

If you pay nothing to acquire a CGT asset, such an interest in a property, you are taken to have acquired the asset for its market value of the CGT asset at time of the event.

You can determine the market value of the interest at the time of disposal by obtaining a valuation from a qualified valuer; or compute your own valuation based on reasonably objective and supportable data.

In your situation, for CGT purposes the transfer of and ownership interest in a portion of property B from your spouse for no proceeds has led to the market value substitution rules being applicable.

Therefore, you are deemed to have acquired this interest for its market value on the date you signed the contract.

You and your spouse both have an ownership interest (50% each) in the former property A which you acquired pre-CGT.

Disposal of an asset acquired prior to 20 September 1985, does not give rise to a taxable capital gain upon disposal. Strata or subdivision of the land also does not alter its pre-CGT status, if you retain ownership of strata or subdivided blocks.

At the time of subdivision and strata titling there was no change in ownership, so your ownership interest in property A retains its pre-CGT status.

Note: the buildings attached to the pre CGT land are considered separate assets for CGT purposes.

The subdivision and strata titling of property A and B will cause the creation of a separate title for each apartments, retail and commercial spaces.

The cost base of the structures you acquired under the JVA is equal to the amount you contributed under the agreement (the money and market value of the post land). This will need to be apportioned between the strata title apartments in block B and C that you retained.

Taxation Determination TD 97/3 states that the Commissioner would accept any approach that is appropriate in the circumstances, for example on an area basis or on a relative market value basis.

However, any cost solely related to one specific apartment, retail or commercial space should be attributed to that apartment, retail or commercial spaces, for example, the cost of connecting services.

It is not mandatory that you obtain an independent valuation for the purposes of apportioning the consideration received on disposal. You should take whatever steps are appropriate to determine the valuation of the particular asset. You can choose to do your own apportionments but, of course, you need to be in a position to justify the estimates you make.

A CGT event A1 occurred when you disposed of some of the apartments.

Upon disposal of your apartments the following will apply:

· your interest in the land attached to the apartments that are situated solely on pre-CGT land will not be subject to CGT. The apartment constructed on this land will be subject to CGT as it is a separate asset as stated above.

· the land attached to the apartments that are situated solely on post-CGT land will be subject to CGT. The apartment constructed on this land will be subject to CGT as it is a separate asset as stated above.

· your interest in the land attached to the apartments situated on both pre and post CGT land will be subject to CGT on the apportion that relates to post CGT land . The apartment constructed on this land will be subject to CGT as it is a separate asset as stated above.

Any capital gain or capital loss made on the disposal of the apartments is calculated on the difference between the cost base of each particular apartment, and the disposal price (excluding the portion of the land value that was acquired pre-CGT).