Edited version of your private ruling

Authorisation Number: 1012109120990

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Ruling

Subject: Capital Gains Tax

Question 1

Are the properties considered to be pre-CGT and therefore tax free in the event of disposal?

Answer

No

Question 2

If these properties were to form part of an amalgamation into a greater development for which the developer gives the entity home units in return, would these units also be a pre-CGT asset?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

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.

The association owns properties.

They were purchased prior to 20 September 1985 in trust for the association.

It was not an incorporated association under the Association Incorporation Act 1984 prior to being incorporated into a company. The constitution of the association when it was unincorporated prevented it from making any distribution to its members.

The association incorporated into a company limited by guarantee at a time after 19 September 1985.

No shares exist. No dividends are paid to members. The proceeds of income are held for the benefit of the broader membership community.

The constitution of the association still prevents it from making any distributions to its members.

At a time after 19 September 1985 and incorporation, the properties were transferred from the trustees to the association.

The transfer was to enable the trustees at the time to resign from that position.

The properties are not trading stock. They were held purely for investment purposes and the income from that was directed for the benefit of the broader membership community.

The association is a resident for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 116-20,

Income Tax Assessment Act 1997 Section 149-10,

Income Tax Assessment Act 1997 Subsection 108-5(1) and

Income Tax Assessment Act 1997 Subsection 960-100(1).

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The properties are not considered to be pre-CGT assets, as the entity last acquired those properties after 19 September 1985.

Detailed reasoning

Section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997), defines what is a pre-CGT asset.

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of the Act;

to have acquired the asset on or after 20 September 1985;

(c) the asset has not stopped being a pre-CGT asset because of this Division.

A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as follows:

A CGT asset is

(a) any kind of property; of

(b) a legal or equitable right that is not property.

The entity owns the asset that is the properties.

The asset was beneficially owned by the unincorporated association prior to 20 September 1985 when the properties were purchased in trust for the association.

An unincorporated association has no separate or distinct existence apart from its members. It is a voluntary combination of persons with some object or purpose in common (Kibby v. Registrar of Titles and Another [1999] 1 VR 861; [1998] VSC 148). Hence an unincorporated association is not an entity at general law.

The entity is a company, which is a body corporate and is an entity at law.

For the purposes of the ITAA 1997, subsection 960-100(1) of the ITAA 1997 includes an unincorporated association and a body corporate separately within the definition of entity. The unincorporated association and the company are separate entities and this is significant.

In general an entity acquires a CGT asset when it becomes its owner. The change from unincorporated association to a body corporate, which are separate entities, resulted in a change of ownership of the asset.

The unincorporated association owned the asset until a time after 19 September 1985 when the unincorporated association became the body corporate. The body corporate then became the new owner of the asset. There was a change of ownership because the incorporated association is a separate entity to the company.

The capital gains and losses provisions of the ITAA 1997 provide roll-over relief in various situations that have the consequence of either:

· deeming assets acquired as a result of the disposal of pre-CGT assets to have been acquired pre-CGT or

· deferring any capital gain made on the disposal of an asset until the replacement assets (asset acquired on the disposal or another asset) is disposed of.

However, there are no roll-overs that apply so that the pre-CGT asset is still taken to be a pre-CGT asset upon transfer from the unincorporated association to the company. That is there is no roll-over when an unincorporated body converts into a company incorporated under the Corporations Act 2001 or any previous Corporations Act.

Consequently, as the entity last acquired the asset after 19 September 1985, the asset is no longer considered to be a pre-CGT asset.

Question 2

Summary

If the two properties were to form part of an amalgamation into a greater development for which the developer gives the entity home units in return, these units would not be a pre-CGT asset.

Detailed reasoning

As explained in the reasons for decision for question one, as the entity last acquired the properties after 19 September 1985 they are not pre-CGT assets. On this basis the proposed home units would also not be pre-CGT assets.

Further to this please note the following:

The amalgamation of the two existing properties into a greater development would be a disposal of these properties (CGT event A1, section 104-10 of the ITAA 1997).

The receipt of the home units would be capital proceeds received for the disposal of the two existing properties.

In accordance with section 116-20 of the ITAA 1997 capital proceeds includes the market value of property received for the happening of a CGT event (e.g. the market value of the home units received).

As the amalgamation will take place after 19 September 1985, the disposal of the existing properties will be after that date. It follows that the home units will be acquired after 19 September 1985 and would not be pre-CGT assets.