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Edited version of your private ruling
Authorisation Number: 1012568798823
Ruling
Subject: Capital gains tax
Question 1
Will A and B make a capital gain or loss on the land and improvements when the property is disposed of?
Answer
Yes
Question 2
Will C make a capital gain or loss on the improvements when the property is disposed of?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
A and B own a property.
C uses the property in their business. C paid for a number of improvements to the land that were used in their business.
C did not pay any rent for the use of the property.
A and B are in the process of selling the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Reasons for decision
Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity.
When considering the disposal of a CGT asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property.
At law, a fixture forms part of the land to which it is attached and, as a consequence, the legal owner of the land is the legal owner of the fixture.
'There is no doubt that the general maxim of the law is, that what is annexed to the land becomes part of the land…'(Eon Metals NL v Commissioner of State Taxation (WA) 91 ATC 4841; (1991) 22 ATR 601 (Eon Metals)).
In this case, A and B are the legal owners of the land. In accordance with the Eon Metals case, A and B are therefore also the legal owners of any buildings or improvements on the land.
Accordingly, when the property is disposed of, A and B will make a capital gain or loss in relation to both the land and improvements.