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Ruling

Subject: capital gains tax implications on the disposal of common property

Question 1

Will there be any capital gains tax (CGT) consequences for the body corporate, if it sells a particular apartment (which is part of common property) in a property being subdivided under a new strata title arrangement?

Answer: No.

Question 2

If the particular apartment generates income before it is sold, will this affect the CGT decision?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The building was built in the 1980s.

The entity is a body corporate located in Queensland.

The body corporate manages a particular apartment located on the building's common property.

The body corporate is planning to subdivide the common property to create a new lot within the scheme, therefore creating an extra unit on the title.

The body corporate hopes to sell the particular apartment under this new strata title arrangement. Profits made from the sale will then be put back into the body corporate sinking fund, rather than being divided between the several owners.

The particular apartment has not been sold by the body corporate previously.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Summary

There are no capital gains tax implications for the body corporate when it sells part of the common property of the building. This is because the body corporate is acting as a mere agent for the principals and owners of the common property, the individual unit owners.

Detailed reasoning

Capital gains tax provisions relating to common property

Taxation ruling TR 97/4 sets out at paragraphs 24 and 25 the Commissioner's view on the ownership of strata title units and ownership of common property.

Ownership of stratum units

24. Stratum units are owned both legally and, unless held on trust, beneficially by each individual stratum unit owner.

Ownership of common property

25. The legal ownership of common property varies under different State and Territory Acts. However, beneficial ownership is universally vested in the stratum unit owners: in Queensland, Victoria, Tasmania and Western Australia the ownership is vested in the individual unit owners as tenants in common in proportions equal to their lot entitlements (Building Units and Group Titles Act 1980 (Qld); Strata Titles Act 1967 (Vic) replaced by the Subdivision Act 1988 (Vic); Conveyancing and Law of Property Act 1984 (Tas); Strata Titles Act 1985 (WA));

Body corporate duties

Income Tax Ruling IT 2505 sets out at paragraph 3 what are the duties of the body corporate.

Each of these State Acts has a common feature, namely, the creation, on registration of the strata scheme, of an entity usually known as the body corporate. On registration the schedule of lot entitlements which allocates a number of lot entitlements to each proprietor's lot in the strata plan is recorded. Lot entitlement defines the share or value of each lot in relation to other lots in the plan. The body corporate is constituted by the proprietors but is a separate legal entity with specified powers, authorities, duties and functions. Though these powers, authorities, duties and functions vary under the different State Acts, generally they include:

· the power and authority to impose a levy on the proprietors, to make by-laws, to carry out necessary work, to invest and to borrow; and

· the duty and function to control, manage and administer the common property, to maintain properly the common property and keep it in a good state of repair, to effect insurances on the building and common property, to keep records and books of account, to levy proprietors and to deposit these levies in nominated funds.

While the body corporate is governed by strata title legislation it can sell part of the common property on behalf the owners of that common property, the individual unit owners. Therefore, the body corporate is merely an agent for the principals, being the unit owners, and when it sells the common property (CGT event A1) it will collect the capital proceeds and distribute those proceeds to the unit owners. It is the unit owners who have disposed of an asset which is part of the common property, not the body corporate.

Accordingly, there are no capital gains tax consequences for the body corporate.

Income from common property

IT 2505, at paragraph 17, also discusses income received from common property.

The assessability of moneys received in respect of the common property, for example, fees derived from the letting of shops situated on the ground floor of a block of apartments where the ground floor forms part of the common property, varies according to the relevant State strata title legislation.

In those States where the common property is vested in the proprietors, viz. Queensland, Victoria, Tasmania, Western Australia, or vested in the body corporate as agent for the proprietors, viz. New South Wales, the income derived from the use of the property constitutes assessable income of the individual proprietors. This is considered to be so even in those States where the strata title legislation prevents a proprietor from ever taking physical receipt (other than on winding-up) of the moneys, and where the moneys are paid directly into one of the body corporate's funds. In these cases, proprietors receive a benefit in that the amount needed to be levied on the proprietors by the body corporate as contributions to the administrative or other fund would be reduced by the rental income applied directly to the fund.

Accordingly these amounts will be included as assessable income of the proprietors. Expenses attributable to the derivation of the income from the common property, including depreciation, would be allowable to the proprietors in proportion to their lot entitlement and to the extent of the revenue producing use of the individual lots.

Again, as the body corporate is merely an agent for the unit owners, it is the unit owners that are assessed on any income received from the common property and not the body corporate.

Accordingly, any income earned from the common property has no capital gains or income tax consequences for the body corporate.