Edited version of your private ruling

Authorisation Number: 1012516306944

Ruling

Subject: CGT event re purchase of blocks of land

Question 1

Did a capital gains tax event occur when the Torrens title lots originally acquired by Company X when converted into strata lots by registration of the plan of strata subdivision on mid 200X?

Answer

No

Question 2

Is each element of the cost base and reduced cost base of the three lots (excluding any buildings or other capital improvements which are taken to be separate CGT assets) as at the time of the strata subdivision calculated by:

(a) adding each element of the cost base and reduced cost base and reduced cost base of the three Torrens title lots; and

(b) apportioning in a reasonable way, each element of the cost base and reduced cost base of calculated under (a) to the three strata lots?

Answer

No

Question 3(a)

Is the date of acquisition of the three strata lots for CGT purposes (excluding any buildings or other capital improvements which are taken to be separate CGT assets) worked out by allocating on a reasonable basis the original acquisition dates of the Torrens title lots to the strata lots?

Answer

Yes

Question 3(b)

Is a reasonable basis for allocating the original acquisition dates of the Torrens Title lots to the strata lots as listed below:

Proportion of a strata lot taken = Market value of land acquired on end

to be acquired on end xx year X xx year X included in the strata lot____

Total market value of the strata lot

And

Proportion of a strata lot taken to = Market value of land acquired on mid

Be acquired on mid xx year Y xx year Y included in the strata lot___

Total market value of the strata lot

Where each market value is calculated as at end xx Year Z

Answer

No

This ruling applies for the following periods:

Xxxx to Yyyy

Yyy1 to Zzzz

The scheme commences on:

Rrrr year.

1. The Company

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

The Company X was registered in an Australian state on mid Jan XXXX. Upon registration of the Company, 50% of the shares in the company were owned by SSS with the other 50% of the shares owned by their spouse, TTT.

TTT passed away on dd/mm/yyyy. Upon the death of TTT, their shares in the Company passed to SSS. Since that time, SSS has been (and continues to be) the 100% shareholder of the Company X.

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

2. The Land.

On xx xxx xxxx, the Company X purchased Torrens title lots located in YYYY. (Lots A and B)

The Torrens title lots acquired on xx xxx xxxx were, respectively, lots aaa and bbb in Deposited plan (DP) mmm and (DP) nnn. The Company X became recorded on the title as the registered proprietor of both lots on xx xxx xxxx.

On xx xxx xxxx, the company X acquired a further parcel of land YYYY adjoining the two parcels of land acquired on xx xxx xxxx, being lot ccc in DP qqq. (Lot C) The Company X became recorded on the title as the registered proprietor on xx xxx xxxx.

Lots aaa, bbb, and ccc are collectively referred to as the "Land". At the time of the Acquisition each Lots aaa, bbb had one house on it. Soon after the land was acquired in year xxxx, the two houses originally built on the land were destroyed. In year xxxx a new house ("middle house") was built. In xxxx, another new house (top house) was built. Other capital improvements have been made to the land over time, which are not the subject of this application.

A summary of the locations and areas of the Torrens title lots referred to in the Application are set out in the table below.

The dimensions of the Torrens lots are marked on the applicable plans in Attachments 1, 2 and 3 (as applicable).

The post-CGT Torrens title lot is Lot ccc in DP qqq, which was acquired on xx xxx xxxx. The total area of this lot is X m2. The other Torrens title lots (being lots aaa and bbb in Deposited plan (DP) mmm and (DP) nnn) were pre-CGT assets having been acquired on xx xxx xxxx.

3. The Strata subdivision

In xxxx, the Torrens title lots were strata subdivided into strata lots under the plan of strata subdivision SPaaaa. 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 locations and areas of the Torrens title lots referred to in the Application are set out in the table below.

The dimensions of the Torrens lots are marked on the applicable plans in Attachments 1, 2 and 3 (as applicable).

The post-CGT Torrens title lot is Lot ccc in DP qqq, which was acquired on xx xxx xxxx. The total area of this lot is X m2. The other Torrens title lots (being lots aaa and bbb in Deposited plan (DP) mmm and (DP) nnn) were pre-CGT assets having been acquired on xx xxx xxxx.

A summary of the locations and areas of the three strata lots are set out in the table below.

The dimensions of the strata lots are marked in the strata plan attached as Attachment 4.

Calculation of Areas:

Set out is a summary and comparison of the calculation of the total areas comprised in:

Lots aaa in DP mmm and bbb in DP nnn and Lot ccc in DP qqq

Lots 1, 2, and 3 in SP xxxx.

There is discrepancy between the area comprised under the deposited plan lots and the area comprised under the strata plan.

Notwithstanding the difference in the area calculations as above, the outside dimensions of the lots comprised in Strata Plan xxxx as shown in attachment 4, this correlates with the outside dimensions of Lots aaa in DP mmm and bbb in DP nnn and Lot ccc in DP qqq (as shown on Deposited Plan xxxx, in attachment 3).

Some further facts regarding the apparent discrepancy between the area comprised under Torrens title lots and the area comprised under the strata plan.

In this regard, the areas of the Torrens title lots were originally measured in perches, up to the nearest quarter of a perch, and then later converted into square metres. A quarter of a perch is approximately x.x square metres. Accordingly, there would have been the potential for quite significant error in the Torrens title measurements on a straight conversion of perches into square metres (that is, if the conversion was not accompanied by physical remeasuring in square metres at the time of conversion). A more accurate measurement, carried out in square metres on the preparation of the strata plan, may well explain the apparent x.x square metre discrepancy between the aggregate Torrens title area and the aggregate strata plan area.

Assumption(s)

Torrens title (m2) Aggregate strata plan

Block (a) xxx.x xxx

Block (b) xxx.x xxx

Block (c) xx.x xxx

Total xxxx xxxx

Relevant legislative provisions

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

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.

Detailed reasoning

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:

any kind of property; or

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 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 CGT 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 ots of land were acquired before 20 September 1985 and accounted originally for xxx.x m sq and xxx.x m sq. Lot aaa which was originally xxx.x m sq became xxx.x m sq and Lot bbb which was originally xxx.x m sq became xxx.x m sq, after the title conversion. Lot ccc was purchased after xx xxx xxxx was originally xx.x m sq, and became xxx.x m sq after the title conversion.

As the Lot aaa and Lot bbb both became smaller blocks, and did not comprise any of Lot ccc, 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 Subdivision 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 aaa being split, Lot bbb being merged with the split portion of Lot aaa, and the split and Lot ccc being merged with the split portion of Lot bbb. that is:

· Lot aaa was split into two assets of xxx m sq and xxx m sq.

· Lot bbb was merged with xxx. xxx m sq of Lot aaa into one block of xxx m sq and then split into two lots of xxx m sq and xxx m sq.

· Lot ccc has merged with the split Lot bbb into one lot of xxx m sq and then split into two blocks of xxx and xxx m sq.

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

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

as at date of title conversion Size of original Lot a

xx xxx xxxx

X xxx

xxx.x

In respect of new Lot bbb it consists of xxx m sq of the original Lot xxx and xxx.x of the original Lot bbb.

Therefore, the cost base of new lot bbb is:

Cost base of Lot aaa as X xxx.x

At xx xxx xxxx xxx.x

Plus

Cost base of Lot bbb as at X xxx.x

xx xxx xxxx xxx.x

Lot ccc consists of all of the original Lot ccc plus xxx m sq of original Lot bbb.

Therefore, the cost base of new Lot ccc is:

Cost base of the original lot bbb as X xxx.x

at xx xxx xxxx xxx.x

Plus

Cost base of original Lot ccc as X xx.x

At xx xxx xxxx xx.x

Because Lot bbb was acquired before xx xxx xxxx to treat Lot ccc as two separate assets, one acquired before xx xxx xxxx and one on or after xx xxx xxxx with the cost base of the original Lot ccc as at xx xxx xxxx

3 (a) Summary

The acquisition date of the strata lots as determined in accordance with subsection 109-5(1) of the ITAA 1997. This requires an apportionment for Lot ccc part of the land for lot was acquired on xx xxx xxxx

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 three 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 strata blocks (lots) are as follows:

Lot aaa xx xxx xxxx

Lot bbb xx xxx xxxx

Lot ccc xx xxx xxxx m sq xx xxx xxxx and xx xxx xxxx m sq (the original Lot ccc, on xx xxx xxxx

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 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:

Strata Lot aaa consists only of part of Torrens Lot aaa, its acquisition date is before 20 September 1985.

Strata Lot bbb consists partly of Torrens Lot aaa and partly of Torrens Lot bbb, its acquisition date is before 20 September 1985.

Strata Lot ccc consists partly of Torrens Lot bbb and partly of Torrens Lot ccc, its acquisition date is determined as xxx.x m sq before 20 September 1985 and xx.x m sq (the original Torrens Lot ccc, is xx xxx xxxx.