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Edited version of your private ruling
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Ruling
Subject: Capital gains tax
Questions and answers:
Are you entitled to a full CGT exemption when you sell each of the residential lots?
No.
Are you entitled to a partial CGT exemption when you sell each of the residential lots?
Yes.
This ruling applies for the following periods:
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You purchased a block of land, along with another couple, prior to 1985.
Your ownership interest as a couple was as joint tenants.
The other couple were also joint tenants.
You and the other couple were then tenants in common with each other.
You and the other couple entered into a contract for the sale of the land to a developer several years ago.
You and the other couple then decided to split the sale price so that you received all of the residential lots and a sum of money and the other couple received a larger sum of money and none of the residential lots. This was by written agreement at the time of settlement.
A deed of acknowledgement of trust confirms that you retained beneficial ownership of the residential lots even though legal title had transferred to the developer.
The development has now been completed and you are joint tenants of all the residential lots.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Section 104-10.
Reasons for decision
Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.
The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.
Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.
In your case, CGT event A1 happened when you entered into the contract for the sale of the original block.
However, as you purchased the land prior to 1985, you can disregard any capital gain or capital loss that you made, as set out in subsection 104-10(5) of the ITAA 1997.
You and the other couple, however, retained beneficial ownership of part of the land, that is, that part of the land that was subdivided into the residential blocks.
As you owned half of the block, you were entitled to half of the proceeds from the sale, that is half of the cash price $X and half of the beneficial ownership of the residential lots.
However, you and the other couple agreed that they would transfer their ownership interest in the residential lots in return for them receiving a greater share of the cash proceeds.
It was agreed that the other couple would receive a larger cash sum and you would receive a smaller cash sum and the entire ownership interest in the residential lots.
As you were entitled to receive half of the total cash component of the sale price but received less than this, you therefore gave up the difference of what you were entitled to and what you received, in order to obtain the other couple's ownership interest in the residential lots.
Therefore, your original interest in the residential blocks retain their status as pre-CGT assets as you had a continuous ownership interest in them from the time you purchased the original block.
However, the ownership interest you obtained when you made the agreement with the other couple is post-CGT, as you acquired this interest after 1985, when the agreement was entered into.
For CGT purposes, your ownership interest in the pre-CGT portion is treated as a separate asset to your ownership interest in the post-CGT portion of the land.
Therefore, you will disregard the capital gain or capital loss in relation to the pre-CGT portion of your ownership interest in the land.
The capital gain or capital loss in relation to the post-CGT portion of your ownership interest in the land will, however, be assessable.
As you have owned the post-CGT interest in the land for more than 12 months, you are entitled to use the discount method to calculate any capital gain you make when you sell the land.