Edited version of your private ruling

Authorisation Number: 1012459638538

Ruling

Subject: First element of the cost base of Heritage Floor space

Question 1

Is it permissible to use the 20XX average price per square meter for heritage floor space (HFS) of $xxx as published in the City of Sydney newsletter, Heritage Floor Space Update, dated December 2012 to calculate the first element of the cost base of the HFS acquired by you in 20XX?

Answer

Yes

Question 2

Is it permissible to use the 19YY, 19XX or the average of the 19YY and 19XX price per square meter for HFS as published in the City of Sydney newsletter, Heritage Floor Space Update, dated December 2012 to calculate the first element of the cost base of the HFS acquired by you in 20XX?

Answer

No

This ruling applies for the following periods:

1 July 2007 to 30 June 2008

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2007

Relevant facts and circumstances

1. You acquired land (The Property) prior to 19 September 1985.

2. A building (The Heritage Building) was located on The Property which was listed in schedule 1 to Central Local Environmental Plan 1992 - Conservation of Heritage Items.

3. The Property was sold in 19XX to The Purchaser.

4. The contract of sale (The Contract) entered into in 19XX relating to the sale of The Property by you to The Purchaser provides the following:

§ Any future Heritage Floor Space (HFS) entered in a register maintained by the Sydney City Council in relation to The Heritage Building would be awarded to you.

§ Specified that you acknowledged that The Purchaser gives no warranty or representation of any kind as to the existence or availability of HFS.

§ Specified that completion of The Contract is in no way dependant upon the making of the development application or the approval of The Purchaser's development application to the Sydney City Council for the award of HFS.

§ No value was assigned to your right for the award of future HFS created by The Contract.

5. The HFS scheme is described by the City of Sydney on their website in the following way:

The heritage floor space scheme provides an incentive for the conservation and ongoing maintenance of heritage items in central Sydney by allowing owners of heritage buildings to sell unused development potential from their site, known as heritage floor space.

When a heritage item owner completes conservation works they may be awarded HFS by the City of Sydney. The awarded HFS can then be sold to a site that requires it as part of an approved development application. The money raised offsets the cost of conserving the heritage item.

How the scheme works

The HFS scheme applies only in central Sydney. A heritage item owner may apply to be awarded HFS when seeking approval for conservation works, or as part of a development that includes the land occupied by the heritage item. The granting of such an award creates HFS supply.

Developments can only achieve certain development potential if HFS is transferred or allocated from the pool of awarded HFS. The requirement to allocate HFS to a development site creates HFS demand.

Selling or transferring HFS is a private transaction between the owner and the prospective buyer - the City acts as the scheme administrator. The cost of legal agreements, transactions and other documentation associated with the award and allocation, or change of HFS ownership is met by the owner and prospective buyer.

The scheme is established by the planning controls in the Sydney Local Environmental Plan 2012 [Sydney LEP] (clauses 6.10 and 6.11) and the Sydney Development Control Plan 2012 (section 5.1.8) details how HFS is awarded and allocated.

The price of HFS

The purchase price of any HFS is determined between the owner and the prospective buyer. Depending on quantum and market conditions, the current purchase price is approximately $400 per square metre.

Please note: it is the prospective buyer's responsibility to contact the HFS owner to negotiate the purchase price.

6. Clause 61 of the Sydney LEP allows the owner of a heritage item to nominate a person to be awarded any HFS resulting from the conservation activity undertaken by them.

7. By 20XX the conditions imposed on The Purchaser by The Contract had been satisfied and a Deed for the Registration of HFS for The Property (Deed of Registration) was entered into by The Council of the City of Sydney, The Purchaser and you.

8. The Deed of Registration allocated HFS to you.

9. In 20XX the City of Sydney published a document titled Heritage Floor Space Update which provides a summary of the HFS market as at 31 December 2012 on page 8. Of relevance this summary provides:

§ an average price per square meter of HFS sold in the relevant calendar year of $xxx per square metre,

§ an average price per square metre of HFS sold in the 19XX calendar year of $587, and

§ an average price per square metre of HFS sold in the 19YY calendar year of $699

10. A representative from the Planning Policy Unit of the City of Sydney was contacted. The representative confirmed that the average HFS floor space sales figures reported in the Heritage Floor Space Update published by the City of Sydney are exclusive of GST.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 112-20

Income Tax Assessment Act 1997, subdivision 960-S

Income Tax Assessment Act 1997, section 960-405

Income Tax Assessment Act 1997, section 960-410

Reasons for decision

Question 1

Summary

It is permissible to value the first element of the HFS awarded to you in 20XX at the rate of $xxx per square meter being the average price per square meter for HFS for the 20XX calendar year, exclusive of GST, published by the City of Sydney in its publication Heritage Floor Space Update, December 2012.

Detailed reasoning

Section 112-20 of the ITAA 1997 contains a market value substitution rule which sets the first element of the cost base of a capital gain tax asset (CGT Asset) to the market value of the CGT asset at the time of acquisition, in circumstances where no expenditure was incurred to acquire the CGT asset.

For the purposes of section 112-20 of the ITAA 1997 the term 'market value' takes its ordinary meaning, modified by subdivision 960-S of the ITAA 1997. Subdivision 960-S of the ITAA 1997 operates to:

§ reduce the market value of an asset by any input tax credits, to the extent that they relate to a taxable supply, which means that the market value is GST exclusive (section 960-405 of the ITAA 1997), and

§ disregard anything that would prevent or restrict conversion of the benefit to money when determining market value (section 960-410 of the ITAA 1997).

It is accepted that the ordinary meaning of 'market value' is the price that a willing but not anxious buyer would have to pay a willing but not anxious seller for the item (see Spencer v. The Commonwealth of Australia (1908) 5 CLR 418).

In your case a CGT asset in the form of HFS was allocated to it as a result of the sale of The Property. While the sale of The Property occurred in 19XX, the HFS was not allocated to you till 20XX. Prior to 20XX you did not have any HFS to sell, you only possessed a right to receive HFS subject to the provisions of The Contract being met (which is a different CGT asset). While the right to receive HFS at some future date existed in 19XX when The Property was sold this right is not the same CGT asset as the actual HFS allocated to you in 20XX.

It was in 20XX that you acquired HFS and had HFS available to sell; as such the appropriate year for the valuation of the HFS is 20XX, not 19XX.

You were allocated HFS in 20XX as a result of the performance of contractual obligations by The Purchaser under the terms of The Contract you did not incur any expenditure in 20XX to acquire the HFS. In circumstances such as these where no expenditure is incurred to acquire a CGT asset, section 112-20 of the ITAA 1997 operates to assign the market value of the CGT asset at the time of acquisition. As such section 112-20 of the ITAA 1997 operates to substitute the first element of cost base of the HFS acquired by you in 20XX to be its market value at this time.

The City of Sydney publish a newsletter titled Heritage Floor Space Update, the December 2012 edition of this newsletter includes a summary of the HFS market, which shows the average price per square meter for HFS sold each calendar year. The average for the 20XX calendar year is $xxx per square meter. It has been confirmed with the City of Sydney that the sales figures reported in its newsletter are GST exclusive.

It is accepted that the $xxx average per square meter for HFS sold in 20XX, reported by the City of Sydney, represents the market value of HFS acquired by you in 20XX. And for the purpose of section 112-20 of the ITAA 1997 forms the basis for the calculation of the first element of the cost base of the HFS acquired you on that date.

Question 2

Summary

Is it is not permissible to use the 19YY, 19XX or the average of the 1997 and 19XX price per square meter for HFS as published by the City of Sydney to calculate the first element of the cost base of the HFS acquired by you in 20XX because you did not hold any HFS in 19YY or 19XX. The CGT asset held by you as a result of the sale of The Property in 19XX was not HFS it was the right to be allocated HFS at some future date, subject to The Purchaser meeting conditions in The Contract.

Detailed reasoning

You did not own HFS until 20XX. The CGT asset held by you, upon completion of the sale of The Property on in 19XX, was a contractual obligation on the part of The Purchaser to direct The City of Sydney to allocate any future HFS associated with The Property to you when and if it was available for allocation.

The obligation of The Purchaser of The Property was qualified by The Contract, in particular:

§ You acknowledged that The Purchaser gives no warranty or representation of any kind as to the existence or availability of HFS.

§ The completion of The Contract was in no way dependant upon the making of the development application or the approval of The Purchaser's development application to the City of Sydney.

It was not certain at the time of sale in 19XX when you would receive HFS or for that matter if you would receive any HFS at all. This contractual obligation between The Purchaser and you is not the same asset as the HFS allocated you in 20XX when The Purchaser fulfilled their obligation under The Contract.

It is not appropriate to directly apply the market values of HFS which is ready and available for sale in 19XX, to the value of a contractual obligation to allocate HFS to you at some future date, subject to certain contractual conditions being met. As such it is not appropriate to use either the 19YY, 19XX or an average of the 19YY and 19XX average HFS prices published by the City of Sydney to value the HFS acquired by you at a much later date in 20XX.