Edited version of your private ruling

Authorisation Number: 1012502131726

Ruling

Subject: CGT event re purchase of blocks of land

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

1. The Company

The Company is a private company that is a resident of Australia for Australian income tax purposes.

The Company was registered in a state in a month. Upon registration of the Company, 50% of the shares in the company were owned by Y. with the other 50% of the shares owned by their spouse, X.

X passed away in 20XX. Upon the death of X, their shares in the Company passed to Y. Since that time,Y has been (and continues to be) the 100% shareholder of the Company.

Apart from the passing of X's shares to Y on their death, there have been no other changes to the legal or beneficial ownership of the shares in the Company since the Company's registration in 19XX.

2. The Land.

On 19YY, the Company purchased two Torrens title lots located in a state. (Lot A and B)

The two Torrens title lots acquired in 19YY were, respectively, lots A and B. The Company became recorded on the title as the registered proprietor of both lots on 19YY.

In 19ZZ, the company acquired a further parcel of landing Lot C adjoining the two parcels of land acquired in19XX, Lot C. The Company became recorded on the title as the registered proprietor on dd/mm/yyyy.

Lots A, B and Lot C are collectively referred to as the "Land". At the time of the Acquisition each Lots A, B had one house on it. Soon after the land was acquired in 19XX the houses originally built on the land burnt down. In 19YY a new house was built. In 20YY, another house (top house) was built. Other capital improvements have been made to the land over time, which are not the subject of this application

3. The Strata subdivision

In 200X, the torrens title lots were strata subdivided into strata lots. The strata plan covers exactly the same land area as the original Torrens title lots. There is no common property in the strata subdivision. The rights of each strata lot holder extends up into the air and down to the ground in the same way as Torrens title land.

A summary of the areas of the three Lots when first acquired under Torrens title lots and after being converted to strata title a table was provided.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 104-10.

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-10(2)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 108-5(2)

Income Tax Assessment Act 1997 Section 109-5(1)

Income Tax Assessment Act 1997, Section 112-25

Income Tax Assessment Act 1997, Section 112-25(3)

Income Tax Assessment Act 1997, Section 112-25(4)

Income Tax Assessment Act 1997 subdivision 149-B

Reasons for decision

Issue 1

Question 1

Summary

The change in the holding of the lots of land from being held under Torrens title to being held under strata tile does not constitute the happening of a CGT event, as there has been no change in beneficial ownership.

The capital gains provisions, Part 3-1, Division 104 of the ITAA 1997, contain 53 CGT events. In your situation only CGT event A1, 104-10 of the ITAA 1997 may apply.

CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset where there is a change of ownership.

Section 108-5 of the ITAA 1997 defines a CGT asset as:

(a) any kind of property; or

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

Note1: after subsection 108-5(2) of the ITAA 1997 gives examples of CGT assets. One of the examples is land and buildings. Therefore, the asset in question is a CGT asset, and it needs to be determined if changing the title to the lots of land from Torrens title to strata title is the happening of a CGT event A1.

The lots of land were originally held under Torrens title. You converted the lots were originally held under Torrens title. You converted the lots from Torrens title to strata title and at the same time changed the size of each lot of this land, although the total size remained unchanged.

You owned the lots of land when they were under the Torrens title, and you continued to own the lots of land after their title was converted to strata title. Therefore, the ownership of the lots of land has not changed. As there has been no change in beneficial ownership of the land, in accordance with subsection 104-10(2) of the ITAA 1997, CGT event A1 does not happen.

Further section 112-25 of the ITAA 1997, regarding split, changed or merged assets, states, if a CGT asset is split, or 2 or more CGT assets are merged, and you are the beneficial owner of the original asset(s) and the new asset(s), no CGT event happens.

In your situation, due to the change in the size of the original blocks of land, upon conversion to strata title, there is both splitting and merging of AGT assets. However, as there is no change in beneficial ownership upon splitting and merging of the CGT assets, no CGT event happens.

Conclusion:

No CGT event happens when the title of the blocks of land is changed from Torrens title to strata title.

Question 2

Summary

In accordance with the method statement in subsection 112-25(3) of the ITAA 1997, the cost base of each element of the cost base of the new assets is worked out by apportioning each element of the cost base of the original assets in a reasonable way.

Detailed reasoning

As stated your situation involves a combination of splitting and merging of assets due to the change in the size of each block of land upon conversion to strata title.

Therefore the elements of the cost base of the new assets, created upon the conversion to strata title, are worked out using a combination of the method statement in subs section 112-25(3) and paragraph 112-25(4)(b) of the ITAA 1997.

Two of the original lots of land were acquired before 20 September 1985

And accounted originally for x m sq and y m sq. Lot A which was originally x m sq became z m sq and Lot B which was originally y m sq became z m sq, after the title conversion. Lot C was purchased after 20 September 1985 was originally v m sq, and became w m sq after the title conversion.

As the Lot A and Lot B both became smaller blocks, and did not comprise any of Lot C, after title conversion, at this point in time they remain pre CGT assets. This may change if there is a change in the underlying ownership of the Company and sub division 149-B of the ITAA 1997 deems the pre CGT assets of the company to have been acquired at the time of the change in the majority underlying ownership.

Further the process of conversion to strata title has resulted in Lot A being split, Lot B being merged with the split portion of Lot A, and the split and Lot C being merged with the split portion of Lot B. that is:

(i) Lot A was split into two assets.

(ii) Lot B was merged with x m sq of Lot A into one block of y m sq and then slit into two lots.

(iii) Lot C has merged with the split Lot B into one lot and then split into two blocks.

In respect of new Lot A, the cost base is calculated as an apportionment of the cost base, at the date of conversion of title, of the original Lot B. That is:

Cost base of original Lot A X Size of new Lot A

as at date of title conversion Size of original Lot A

dd/mm/yyyy

In respect of new Lot B it consists of the original Lot A and the original Lot B.

Therefore, the cost base of new lot B is:

Cost base of Lot A as X x

At dd/mm/yyyy y

Plus

Cost base of Lot B as at X z

dd/mm/yyyy v

Lot C consists of all of the original Lot C plus x m sq of original Lot B.

Therefore, the cost base of new Lot C is:

Cost base of the original lot B as X w

at dd/mm/yyyy t

Plus

Cost base of original Lot C as X s

At dd/mm/yyyy t

Because Lot B was acquired before 20 September 1985 to treat Lot C as separate assets., one acquired before 20 September and one on or after 20September 1985 with the cost base of the original Lot C as at dd/mm/yyyy.

Question 3(a)

Summary

The acquisition date of the three strata lots as determined in accordance with subsection 109-5(1) of the ITAA 1997. This requires an apportionment for Lot C part of the land for lot was acquired on dd/mm/yyyy.

Detailed reasoning

Subsection 109 - 5(1) of the ITAA 1997 states:

In general, you acquire a CGT asset when you become its owner that is the time when you acquire the asset is when you become its owner.

As stated in response to question 1, the change of holding from Torrens title to strata title does not constitute a CGT event. Therefore, you acquired the strata lots when you originally acquired the land under Torrens title.

Conclusion:

Therefore, in accordance with how the cost base was determined in our response to question (2), the acquisition dates of the three strata blocks (lots) are as follows:

Lot A dd/mm/yyyy

Lot B dd/mm/yyyy

Lot C x sq dd/mm/yyyy and y m sq (the original Lot C, on dd/mm/yyyy.

Question 3(b)

Summary

A reasonable basis for apportionment of the blocks of land to ascertain their date of acquisition is on an area basis.

Detailed reasoning

As stated in response to question 3 (a) the acquisition date of the three Lots of land is determined in accordance with subsection 109-5(1) of the ITAA 1997. That is you acquired the strata lots (blocks) when originally you acquired them under the Torrens title.

Therefore, a reasonable basis of apportionment is on an area basis. This means that as:

(i) Strata Lot A consists only of part of Torrens Lot A, its acquisition date is dd/mm/yyyy.

(ii) Strata Lot B consists partly of Torrens Lot A and partly of Torrens Lot B, its acquisition date is dd/mm/yyyy

(iii) Strata Lot C consists partly of Torrens Lot B and partly of Torrens Lot C, its acquisition date is determined as x m sq on dd/mm/yyyy and y m sq (the original Torrens Lot C, is dd/mm/yyyy.