Edited version of private advice

Authorisation Number: 1012632355485

Ruling

Subject: Sale of property

Question 1

Will the pre-capital gains tax (CGT) status of the land be retained when the land is subdivided into two lots and you become sole owners of one lot, and dispose of your interest in the other lot?

Answer

No.

Question 2

Will the goods and services tax (GST) status still apply as per the previous ruling provided to you, on the sale of your respective interests in the property if the property is subdivided into two lots and you become sole owners of one lot?

Answer

Yes.

Relevant facts and circumstances

• You are not registered for GST.

• You, together with another entity, as tenants in common, purchased a property in Australia before 1 July 2000. The property is on a single title.

• Originally, there was a dilapidated house together with a couple of sheds on the property. Due to safety concerns, the local council requested that these structures be removed and this was done.

• There was no partnership agreement in place between the co-owners of the property in relation to the purchase, sale or use of the property.

• You purchased the property with the intention of building your own private residence there.

• Due to personal reasons, you were willing to part ways with the other co-owner and you wanted to sell the property. The property has been listed for sale with various agents over a number of years.

• Although you and the other co-owner wanted to sell the property, the other co-owner never accepted the selling prices suggested or any offers to purchase the property. Therefore, you applied to the X Civil and Administrative Tribunal (XCAT) to resolve any disputes about selling the property.

• Under a XCAT order, the property was to be placed for sale by public auction with a reserved price.

• You have not received any income or other monetary benefits in connection with the property, and you have not used the property for any purpose. That is, you have not used the property for any business or other income-producing activities, or for any personal/private activities. In particular, you have not undertaken any development activities on the property, purchased any adjoining blocks or made any applications to the local council for subdivision, development or rezoning approval. The property has remained dormant and vacant.

• Expenses that have been incurred in relation to the property are council rates, land tax and maintenance costs including grass cutting expenses. These expenses have been shared between, and paid for by all the co-owners of the property. You have not claimed any income tax deductions for expenses incurred in relation to the property.

• You have been previously advised in a Private Ruling that GST would not be payable on the eventual sale of your respective co-ownership interests in the property.

• The property has been listed for sale. Offers have been made, however they have not satisfied the reserve price as stipulated under the XCAT order.

• You and the other co-owner are not on speaking terms. Ongoing disputes relate to the reserve price and whether the property should be sold.

• With the constraints in receiving any agreement and cooperation from the other co-owner, you would like to subdivide the property so that your co-ownership is on separate titles.

• It is proposed that the land will be subdivided into two equal lots (Lots A and B). The other co-owner will choose one lot and you will take the other lot.

• You plan to sell your lot after the subdivision.

• You will not be building a residence on the land, as you originally intended.

• You need to dispose of your interest in the property for personal reasons.

Relevant legislative provisions

Income Tax Assessment 1997 section 6-5,

Income Tax Assessment 1997 section 104-10,

Income Tax Assessment 1997 paragraph 104-10(5)(a),

Income Tax Assessment 1997 section 108-7,

Income Tax Assessment 1997 section 120-20,

A New Tax System (Goods and Services Tax) Act 1999 section 7-1,

A New Tax System (Goods and Services Tax) Act 1999 section 9-5, and

A New Tax System (Goods and Services Tax) Act 1999 section 9-20.

Reasons for decision

Issue 1

Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset.

For CGT purposes, when an original land parcel is divided into two or more separate assets, this subdivision does not result in a CGT event if you retain ownership of the subdivided blocks.

Therefore, you will not make a capital gain or a capital loss at the time of the subdivision.

However, if tenants in common subdivide land and transfer their interests so that they hold ownership interests in different titles, each is liable for CGT. A disposal occurs because the transfer of interests between the tenants in common amounts to a change in the legal and beneficial ownership of those interests. This is set out in Taxation Determination TD 92/148.

The following example from TD 92/148 can be compared to your own situation:

A and B were joint owners of a one hectare block of land acquired in 1986. In 1992, they subdivide the land. A took a one-half hectare block (block 1) and B took the other one-half hectare block (block 2). A acquired a 50% interest in land constituted by block 1 in 1986 and acquired the remaining 50% interest from B in 1992. Similarly, B acquired a 50% interest in the land constituted by block 2 in 1986 and acquired the remaining 50% interest from A in 1992.

A and B have each disposed of their 50% interest in that land constituted by blocks 2 and 1 respectively, in 1992.

Note: If the original land had been acquired pre-CGT, there would be no disposals subject to CGT. However, in respect of each subdivided block, each individual owner would now hold a 50% pre-CGT interest and a 50% post-CGT interest.

You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). However, a capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985.

In your case, when the property is subdivided into lots A and B, all the co-owners will hold an ownership interest in both lots. Although the act of subdividing the land does not trigger a CGT event, when a transfer occurs so that you become the owners of lot A and the other co-owner becomes the owner of lot B, CGT event A1 will occur.

As each interest in the original property was acquired before 20 September 1985, any capital gain can be disregarded at this point. However, as a result of the change in ownership, you will hold both a pre CGT and a post CGT interest in lot A. The cost base for the post CGT interest will be 50% of the market value of lot A at the time of the transfer.

Issue 2

Summary

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Under section 9-5 of the GST Act, you make a taxable supply if:

• you make the supply for consideration

• the supply is made in the course of carrying on an enterprise

• the supply is connected with Australia, and

• you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

On the facts of this case, there are no provisions in the GST Act to make the sale of your respective interests in the property, GST-free or input taxed.

The sale of your respective interests in the property will be a supply made for consideration, being the sale price for your lot under the relevant sale contract. Further, the property comprises real property situated in Australia and as such, your sale is a supply connected with Australia.

You are not registered for GST. Therefore, in deciding whether the sale of your respective interests in the property is a taxable supply, we need to determine whether the sale is made in the course of carrying on an enterprise and if yes, whether at the time of sale, you are required to be registered for GST.

We have previously ruled that on the facts provided, our view is that a tax law partnership does not exist between any of the co-owners of the property, as you have not received any income in connection with the property. This means that for GST purposes, each co-owner of the property is making a separate supply of their own individual interests in the property.

Partitions by co-owners

The Commissioner's guidelines on the GST consequences of the partitioning of real property among joint tenants or tenants in common are set out in GST Ruling GSTR 2009/2.

In that ruling, the division of land and the transfer of the divided parts between the co-owners, so that one or more co-owners become the owner in severalty of a specifically ascertained part(s) of the land, is referred to as 'partition'.

A partition of land may be effected by either an agreement between the co-owners (partition by agreement) or as a result of a court order (court-ordered partition).

Under a partition, the transfer or conveyance by each co-owner of their respective interest in the land to be taken by the other co-owners in severalty is a supply as defined in s 9-10(1) of the GST Act. The Commissioner considers that each co-owner makes a supply of each interest transferred.

We have previously ruled that, on the facts provided, we consider that the sale of your respective interests in the property is not made in the course of an enterprise that you carry on, either individually or as a partnership. The reasons for decision provided in that previous ruling equally apply to this ruling.

We consider that the sale of your respective interests does not amount to an enterprise in the form of an adventure or concern in the nature of trade, but is the mere realisation of a capital asset. This is despite the fact that you have not used the property for private residential purposes as originally intended, and that you may also be making supplies when your interests are transferred as a result of the partitioning.

As the sale of your respective interests in the property is not made in the course of carrying on an enterprise, the sale does not meet all of the requirements for a taxable supply under section 9-5 of the GST Act. Therefore, GST is not payable on the sale of your respective interests in the property.