Edited version of your private ruling

Authorisation Number: 1012480333491

Ruling

Subject: Subdivision of common property

Questions

Does CGT Event B1 happen at the time the Owner's Corporation granted exclusive use to the Developer?

Answer: No

Does CGT Event E1 happen at the time the Owner's Corporation granted exclusive use to the Developer?

Answer: Yes

Does CGT Event A1 happen to the Owner's Corporation on the proposed sale of the property?

Answer No

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 1999

Relevant facts

A development was carried out in NSW which developed a number of commercial lots.

The Strata Plan was registered after completion of stage 1 of the development.

The Owner's Corporation for the Strata Plan is not registered for GST.

The Strata Plan consists of X lots and included a section at the rear of the development designated 'common property'. This common property was initially labelled Lot X on the original planning documents submitted for council approval.

In the original plans Lot X was to be held in the developer's name.

Lots X and X are owned by the developer.

The development plans were redrawn to establish lot X as common property to gain council approval.

Sometime in the 2000's, the developer decided to complete the development of Lot X as always intended. This required consent of the Owner's Corporation as required by Statue.

The Owner's Corporation for the Strata Plan resolved to consent to the subdivision of the common property into Lot X.

The developer was granted 'exclusive use and benefit' of the development of Lot X. The Owners Corporation received no consideration for this nor was it ever expected that it was entitled to any.

The developer has covered all costs of the development of Lot X.

The developer has also been responsible for the levies and costs of Lot X.

No formal documentation was prepared to show that the developer was entitled to develop the common property.

Title to Lot X, formerly the common property, is held by the Owner's Corporation. There is no plan to transfer the title to the developer.

The developer has now found a willing purchaser for Lot X and it is expected that the sale will proceed in the near future.

At an extraordinary meeting the Owner's Corporation resolved to allow the sale of Lot X to proceed subject to a number of conditions.

The Owner's Corporation will not be entitled to any proceeds from the sale of the property except recovery of outstanding levies on Lot X and associated costs incurred to finalise the sale.

The Owner's Corporation has not received any income from the use of Lot X at any time.

Prior to the settlement of Lot X, the Owner's Corporation and the developer will execute a deed outlining the conditions to complete the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-10(5)

Income Tax Assessment Act 1997 section 104-10(5)(a)

Strata Schemes (Freehold Development) Act 1973 (NSW) section 20

Reasons for decision

Taxation Ruling IT 2505 explains that common property is that part of the strata plan not comprised in any proprietor's lot. Paragraph 4 of IT 2505 explains that in New South Wales the ownership of common property is vested in the body corporate as an agent for the proprietors as tenants in common in proportion to their lot entitlement.

When the body corporate transfers or sells Lot 10 this means that each lot holders are in effect disposing of their individual interest in the common property.

Property, or an interest in property, is a CGT asset (section 108-5 of the ITAA 1997).

CGT event B1

CGT event B1 happens if you enter into an agreement with another entity under which:

the right to the use and enjoyment of a CGT asset you own passes to another entity; and

title in the asset will or may pass to the other entity at or before the end of the agreement: subsection 104-15(1) of the ITAA 1997.

If the title to the property never passes at or before the end of the agreement, then any capital gain or loss the taxpayer made from CGT event B1 happening would be disregarded: paragraph 104-15(4)(a) of the ITAA 1997.

In this situation the Owner's Corporation granted exclusive use of Lot X to the Developer in 20XX. It therefore can be said that use and enjoyment of the CGT asset passed to the Developer.

However, as the legal title has not passed and will never pass to the Developer per the terms of the agreement, any gain or loss from CGT event B1 is not deemed to have occurred.

CGT Event E1

A CGT Event E1 happens when you create a trust over a CGT asset by declaration or settlement.

Potentially CGT event E1 could happen with the passing of the special resolution transferring use and enjoyment from the Owners Corporation to the Developer. In order for this to be the case a trust over the lot must have been created.

The creation of trusts falls within the jurisdiction of equity.

According to G. Teh and B. Dwyer, Introduction to Property Law, at paragraph 606

a trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary.

There are several kinds of trusts, including express and bare.

It is possible for the legal ownership of an asset to differ from the beneficial ownership. Where the legal and beneficial ownership of an asset is different a trust situation occurs.

In general, the CGT provisions place the liability for tax on the legal owner/s of a CGT asset. However, if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, the CGT provisions apply to an act done by the trustee (such as selling the CGT asset), as if it were an act done by the beneficiary (section 106-50 of the ITAA 1997).

The phrase absolutely entitled to a CGT asset as against the trustee of a trust applies to bare trusts. A trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of the legal title of the asset for the benefit of the beneficiaries. Further, the trustee has no duties to perform, or no further duties to perform, other than to transfer the asset to the beneficiaries or carry out directions given by the beneficiaries in regard to the asset, for example, direction to sell a dwelling to a third party (Herdegen & Anor v. Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271).

We have examined the possible existence of a bare trust in this case. We conclude that the Owners Corporation does hold Lot 10 for the Developer as a bare trustee.

In summary, the Commissioner accepts that a bare trust was created over Lot X.

As stated, in New South Wales the ownership of common property in a strata scheme is vested in the body corporate as agent for the proprietors as tenants in common in proportions equal to their respective lot entitlements.

It is considered that the cost base of the asset to the individual unit holders would be nil. No value can be properly attributed to their interest in that common property at acquisition it was acquired with an open understanding of its anticipated development and that they would have no significant use or enjoyment of it as genuine common property. There were no subsequent costs incurred by the individuals or the Owners Corporation in bringing Lot X into existence or transferring the ownership. Furthermore, as the trust was created for nil consideration we could consider there to be nil capital gain or loss to the unit holders.

CGT event A1 in relation to the sale of Lot X

If a change of ownership of a CGT asset occurs, CGT event A1 happens (section 104-10 of the ITAA 1997).

Section 104-10 states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership in the CGT asset occurs from you to another entity.

Absolutely entitled

Section 106-50 of the ITAA 1997 deals with the situation where the beneficiary is absolutely entitled as against the trustee of the trust. In this situation any act done by the trustee is treated as an act carried out by the beneficiary.

Section 106-50 of the ITAA 1997 provides:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

This means that if an asset is held on a bare trust, the capital gains tax provisions would apply by looking through to the beneficiary. The beneficiaries are then responsible for any capital gains tax liability which may arise as a result of the disposal of the property.

A sole beneficiary in respect of a trust asset will be absolutely entitled to that asset as against the trustee if the beneficiary can terminate the trust by directing the trustee to transfer the asset to them or to transfer it at their direction.

In this instance the Developer is the sole beneficiary in respect of Lot X and has the totality of the beneficial interests in the asset. He has demonstrated that he can direct the Owners Corporation, via a Deed of Sale, to transfer the property, thereby terminating the trust. He therefore satisfies the requirement that his interest in the asset be vested in possession and indefeasible.

Thus the Developer is absolutely entitled as required in section 106-50 ITAA 1997. The sale of Lot X is thereby treated as an act carried out by the Developer and not the Owners Corporation. CGT event A1 does not happen to the individual unit holders.