Edited version of your written advice

Authorisation Number: 1012693249075

Ruling

Subject: Ocean liner residency right - third element of cost base

Question:

Are your recurring maintenance charges included in the cost base of your cruise ship asset under section 110-25(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You purchased a residency right to an apartment for your private use on a cruise ship, which was registered overseas. The right was essentially an indefinite right, which would terminate only under exceptional circumstances. Under the residency agreement, you were required to pay recurring charges for maintenance.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-235

Income Tax Assessment Act 1997 Section 108-20

Income Tax Assessment Act 1997 Section 108-30

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 118-42

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 124-190

Income Tax Assessment Act 1997 Section 995-1

Acts Interpretation Act 1901 Section 15AA

Reasons for decision

CGT event A1

On dd/mm/yyyy you disposed of your residency right to an apartment on a cruise ship. This resulted in CGT event A1 in section 104-10 of the ITAA 1997 disposal of a CGT asset.

A CGT event K7 did not occur pursuant to section 104-235 of the ITAA 1997 because you did not hold a depreciating asset within the meaning of 'hold' in section 40-40 of the ITAA 1997.

Cost base

The cost base of a CGT asset is defined in section 110-25 of the ITAA 1997.  It consists of five elements. The third element is non-capital cost of owning a CGT asset if the asset was acquired after 20 August 1991.

Personal use assets

In general, costs of maintaining, repairing or insuring a CGT asset are included in the third element of an asset's cost base under subsection 110-25(4) of the ITAA 1997. However, the note in subsection 110-25(4) states:

This element does not apply to personal use assets or collectables: see sections 108-17 and 108-30.

Similarly, section 103-30 of the ITAA 1997 states that in working out the cost base of a personal use asset, disregard the third element (about the costs of ownership).

Therefore, if the residency right you purchased is a personal use asset then the costs of ownership will not be included in the asset's cost base.

Section 108-20 of the ITAA 1997 includes in its definition of a 'personal use asset':

…a CGT asset (except a collectable) that is used or kept mainly for your (or your associate's) personal use or enjoyment…

However, subsection 108-20(3) states:

A personal use asset does not include land, a stratum unit or a building or structure that is taken to be a separate CGT asset because of Subdivision 108-D.

In relation to personal use assets, the Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986, which led to the introduction of the CGT legislation, states:

Capital losses (to be calculated without taking into account any indexation adjustments for inflation) realised in an income year will be available to be offset against capital gains realised in the same year or may be carried forward without time limit and offset against capital gains realised in subsequent years. However, losses on personal-use assets, i.e., assets that are used or kept primarily for the personal use and enjoyment of a taxpayer or a taxpayer's associates, except for specified kinds of personal-use assets, will not be so deductible.

Personal use assets include such items as clothing, white goods, furniture, sporting equipment, caravans, boats, etc., which generally tend to depreciate in value rather than appreciate.

Stratum units - references in the taxation legislation

Section 995-1 of the ITAA 1997 states that 'stratum unit' has the meaning given by section 124-190 of the ITAA 1997.

The word 'meaning' is not defined in the tax legislation and assumes its ordinary meaning. In other words, 'stratum unit' has the meaning within the whole context of section 124-190. Section 124-190 is the only provision in Subdivision 124D which is headed 'strata title conversion'. Subsection 124-190(1) states:

You can choose to obtain a roll-over if:

(a) you own property that gives you a right to occupy a unit in a building; and

(b) the building's owner subdivides it into stratum units; and

(c) the owner transfers to you the stratum unit that corresponds to the unit you had the right to occupy just before the subdivision.

Subsection 124-190(3) goes on to state:

A stratum unit is a lot or unit (however described in an Australian law or a foreign law relating to strata title or similar title) and any accompanying common property.

'Stratum unit' is also referenced in a number of other provisions in the taxation legislation. Specially, section 118-42 of the ITAA 1997 provides capital gains tax relief on the transfer of stratum units. That provision specifically applies to the subdivision of buildings which are on land.

Strata title subdivision, in the context of section 118-42, is explained in paragraph 21 of Taxation Ruling TR 97/4, as follows:

Strata title subdivision is achieved by registering a strata plan. Strata title legislation provides for the grant of a separate Torrens title for individual parts of a building. On registering a strata plan, a separate title is created for each lot or each lot and common property in much the same way as separate titles are created for lots in a subdivision of land. A strata title subdivision must involve two or more lots and almost always involves common property. On registering the plan, an entity known as the 'body corporate' is created. The body corporate is constituted by the registered proprietors of the stratum units and is a separate legal entity. Each lot is allocated a 'unit entitlement' on subdivision. The unit entitlement of each lot in relation to the aggregate entitlement of all lots is specified in the registered strata plan and determines the voting rights of the proprietor, the share of the proprietor in the common property and the proportion of contributions levied by the body corporate to cover administrative and other expenses.

The Commissioner's view is therefore that strata title relates to individual parts of a building, where a building is a structure over land. That is, the reference is to real property rather than any other form of property interest.

The Explanatory Memorandum to Tax Law Improvement Act (No. 1) 1998 states:

Subdivision 124-D provides an optional roll-over where a building is converted to strata title.

Section 124-190 Strata title conversion

Change

Provide a standard definition of stratum unit.

Explanation

The 1936 Act contains two conflicting definitions of stratum unit. The rewritten provisions, to simplify and standardise the law, adopt the broader definition which extends to units registered in another country and commercial buildings. The only practical effect of the adoption of this wider definition is that it enables the main residence exemption to be claimed for an overseas stratum unit that is the main residence of an Australian resident.

The explanatory memorandum shows that there was no intention to expand the exclusion from personal use assets provided for in subsection 108-20(3).

The meaning of 'stratum' in Australian law

Section 995-1 of the ITAA 1997 defines 'Australian law' as "means a Commonwealth law, a State law or a Territory law."

Strata legislation in each Australian jurisdiction provides for the division of buildings by the grant of title to parcels of land (often referred to as 'lots') that are defined by horizontal and vertical subdivision. For example 'Stratum' is defined in section 4(1) of the Transfer of Land Act 1958 (Vic) as:

"stratum" means a part of land consisting of a space of any shape below, on, or above the surface of the land, or partly below and partly above the surface of the land, all the dimensions of which are limited; and "strata" is the plural of "stratum".

State legislation refers to plans over land in the relevant act. Similar references appear in the legislation of the other states.

Strata schemes involve the registration of a strata plan or other appropriate plan of subdivision, and in most States it can only be on Torrens title land.

A stratum unit therefore necessarily involves some connection with land.

Condominiums in the relevant overseas State

You have advised that title to a condominium also encompasses ownership of the land and common areas with the remaining unit holders. Further, you state that an individual buying a condominium usually receives a deed which describes the individual unit, the building in which the unit is located, and the property upon which the building is constructed.

Section 15AA

In respect to interpreting legislation, section 15AA of the Acts Interpretation Act 1901 states:

In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

Application of law in your case

In your case, you entered into a 'residency agreement'. The 'purchase' involved entering into a contractual relationship with the legal owner of the cruise ship. The agreement was governed by the laws of the overseas country, as well as the general principles of the maritime law of that country. We acknowledge the agreement provided you with a contractual right to occupy a residence on the yacht. However, based on the definitions in the legislation, your residency right on the ship is not a 'stratum unit' within the meaning given by section 124-190 because your residency right does not involve real property. In Australia, strata units are interests registered with a government authority governing the relevant strata scheme. Your interest was not registered with any government authority.

There is a similar requirement in the overseas country that title to a condominium relate to real property (interests in land) and that the interest be registered. Your residence right does not meet the requirements of a strata unit under an Australian law or a foreign law relating to strata title or similar title.

In considering section 15AA, we consider defining your residency right as a 'stratum unit' would not achieve the purpose or object of the Act since the purpose of the Act was to exclude personal use assets which generally tend to depreciate in value over time rather than appreciate. We would expect your residency right, over a longer term period, would decline in value and probably become worthless (unlike land, a stratum unit or a building, which have been excluded as personal use assets and would be expected to appreciate in value over time, even if demolished and restored as land).

Alternative argument

In ATO Interpretative Decision ATO ID 2011/9, the Commissioner ruled an art work acquired as a long term investment and not in the course of carrying on any business or profit making activity was used or kept mainly for the personal use or enjoyment of the taxpayer and therefore remains a collectable under paragraph 108-10(2)(a) of the ITAA 1997.

In your case, whilst it could be argued your residency right was an 'investment', particularly as it did appreciate and was rentable over your period of ownership, since it was mainly used or kept mainly for the personal use or enjoyment, your residency right will maintain its status as a personal use asset.