Edited version of your private ruling

Authorisation Number: 1012471316640

Ruling

Subject: CGT - strata plan - beneficial ownership - merging assets

Question 1

Is the transfer of the legal title to lot X on Strata Plan to the Strata Company a disposal to which section 104-10(1) of the Income Tax Assessment Act 1997 applies?

Answer

No

Question 2

Does the scheme by which lot X on Strata Plan is to be separated from the Strata Plan result in the loss by any of the owners of lots Y to Z of the pre-CGT interests in their lots, where such interests were acquired before 20 September 1985?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You are the owner of a lot in Strata Plan (SP), and you hold a share of common property proportionate to your interest in SP.

SP is a registered Strata Plan under the relevant State legislation.

Some of you acquired the whole of your lot prior to 20 September 1985.

Some of you acquired a part share of your lot prior to 20 September 1985.

Some of you acquired the whole of your lot after 19 September 1985.

You acquired your share in the common property at the time you acquired your interest in your lot.

It is proposed that lot X will split from SP so that a separate Certificate of Title will issue which makes lot X stand apart from SP thereafter (the proposal).

An application for approval was made to, and granted in year ended 30 June 2011 by the Planning Commission (PC) for this split of lot X from SP.

Under the proposal, lot X will forgo its interest in the common property of SP and the remaining lot owners will acquire a proportionate interest in that common property.

The procedure by which the proposal will be carried out is legislated by the relevant State legislation. This procedure requires that the following steps be taken:

· A licensed surveyor must create a deposited plan which shows lot X and the balance of SP as separate lots, one being lot X and the other being lots Y-Z plus the common property;

· An application is then made to the PC for subdivision, and if this is approved, lot X is transferred to the Strata Company to become part of the common property of SP;

· A separate Certificate of Title is then created for lot X by the Registrar of Titles. Lot X is then transferred by the Strata Company to the original owner of lot X, thus removing it from the strata scheme;

· The original Strata Plan is amended by striking through lot X in the schedule of unit entitlements, as a result of which the remaining owners of lots Y-Z absorb lot X's former unit entitlement in the common property of SP.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 paragraph 104-10(2)(a)

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 109-5(2)

Income Tax Assessment Act 1997 subsection 104-5

Income Tax Assessment Act 1997 section 180-65

Reasons for decision

Question 1

Summary

CGT event A1 does not occur when lot X is transferred to the Strata Company in accordance with the procedure legislated by the relevant State legislation for creating a separate Certificate of Title for lot X. Thereby, the owners of lots Y-Z are not affected by the transfer of lot X to the Strata Company and the subsequent transfer of lot X back to the original owner.

Detailed reasoning

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that capital gains tax (CGT) event A1 happens if you dispose of a CGT asset. Such a disposal takes place whenever there is a change of ownership from one entity to another. However paragraph 104-10(2)(a) of the ITAA 1997 states that a change of ownership does not occur if an entity ceases to be an asset's legal owner but continues to be its beneficial owner.

Taxation Ruling No IT 2505 deals with strata title bodies corporate, the taxation treatment of common property and income received by the body corporate. Paragraph 4 explains that common property is that part of a strata plan that is not comprised in any proprietors' lot and includes areas such as stairways, lifts, passages, common gardening areas and other facilities intended for common use.

The ownership of common property varies under different State Acts, and Taxation Ruling TR 97/4, which deals with strata title subdivisions, states at paragraph 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 this case, lot X will be transferred to the Strata Company at which time lot X will become common property in accordance with the relevant State legislation. The owner of lot X will continue to be a member of the body corporate and will continue to enjoy the right to occupy the lot and the legal transfer of the lot will only occur in accordance with legislative requirements.

In deciding whether there has been change in the beneficial ownership of the lot, the following facts are relevant:

· the change in legal ownership will be temporary;

· it will only be undertaken in order to comply with State strata title legislation; and

· the legal ownership will revert straight back to the original owner of lot X.

It is therefore considered that there will be no change in the beneficial ownership of lot X. Consequently CGT event A1 will not happen due to the exclusion in paragraph 104-10(2)(a) of the ITAA 1997 when you transfer lot X to the Strata Company.

Transfer of ownership back to the original owner of lot 18

As previously discussed, in the current situation you are proposing the transfer of lot X to the Strata Company. Under State legislation, the Strata Company will then be the legal owner as agent for the owners.

However this legal change of ownership will be undertaken only to comply with State legislation and there is no intention to transfer the beneficial rights over the lot, or for the transfer to be permanent.

It is considered that there will be no disposal or change of ownership for the purposes of section 104-10 of the ITAA 1997. This is because the beneficial ownership will not change when the legal ownership is transferred to the Strata Company. When the lot is transferred back to the original owner of lot X, the owner will already have had beneficial ownership and all that will happen is that the legal ownership is being returned.

Consequently, section 104-10 of the ITAA 1997 does not recognise that a change in ownership will occur, and the original owner of lot X is taken to have continued to own the lot. Therefore CGT event A1 will not happen when the legal ownership is returned to the original owner.

Question 2

Detailed reasoning

The CGT regime applies where a CGT event happens to CGT asset acquired by a taxpayer after 19 September 1985.

A CGT asset acquired pre 20 September 1985 is characterised as a Pre-CGT asset.

A CGT asset acquired post 19 September 1985 is characterised as a Post-CGT asset.

Subsection 104-5 of the ITAA 1997 provides a summary of the CGT events which will give rise to a capital gain or a capital loss as result of the CGT event happening.

The general rules for the acquisition of CGT assets are contained in section 109-5 of the ITAA 1997. The table in subsection 109-5(2) of the ITAA 1997 specifically states that where an entity disposes of a CGT asset to you, you acquire it when the disposal contract is entered into or, if none, when the entity stops being the asset's owner.

The time of acquisition of a CGT asset is important for four reasons:

· CGT generally does not apply to assets acquired before 20 September 1985 (pre-CGT assets).  

· Different cost base rules apply to assets acquired at different times - for example, the costs of owning an asset are not included in the cost base if you acquired it before 21 August 1991. 

· It determines whether the cost base can be indexed for inflation and the extent of that indexation (see The indexation method of calculating your capital gain on the ATO's website www.ato.gov.au). 

· It determines whether you are eligible for the CGT discount - for example, one requirement is that you need to have owned the CGT asset for at least 12 months (see The discount method of calculating your capital gain on the ATO's website)

In your case, the proposal relates to you acquiring an additional interest in the common property of SP, which will be added to your existing interest/s in the common property which were either acquired:

· wholly prior to 20 September 1985;

· partially prior to 20 September 1985; or

· wholly after 19 September 1985.

For CGT purposes, your acquisition of the additional interest in the common property will result in the creation and holding of two assets. In some cases this will be a holding of both a pre-CGT asset and a post-CGT Asset.

Section 180-65 of the ITAA 1997 states that if you acquire land on or after 20 September 1985 that is adjacent to land you acquired before that day, then the later acquisition of land is taken to be a separate CGT asset from the original land if it and the original land are amalgamated into one title.

As such the acquisition and addition of the new share in the common property to the existing title of any interest in the common property which was acquired pre-CGT, will not give rise to a CGT event as described in section 104-5 of the ITAA 1997.

This is in line with the Commissioner's view in CGT Determination Number 8 (CGT TD 8).

The example given by the Commissioner in paragraph 2(ii) of CGT TD 8, states that if one property was acquired pre-CGT and the other after 19 September 1985, there are no CGT consequences on the amalgamation. The land acquired after 19 September 1985 remains subject to the CGT provisions and the pre-CGT land remains exempt.

As such it is necessary for you to maintain the necessary and relevant records relating to the values and costs of the common property, for the purposes of establishing the cost base of the assets. The additional interest in the common property of SP which you will receive as a result of lot X's separation from the Strata Plan will result in you holding a separate CGT asset to your original interest in the common property if your original interest/s is a pre-CGT asset.