Edited version of your written advice

Authorisation Number: 1012767515124

Ruling

Subject: Capital gains tax

Question

Were the management rights sold in the 2013-14 financial year a pre capital gains tax (CGT) asset?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

The Body Corporate was created prior to 1985. This is the date on which the Building Units Plan was registered.

The Body Corporate elected to engage a salaried full-time caretaker to carry out the duties of the site manager.

The employment of the caretaker was terminated in the 2013-14 financial year.

At that time, the Body Corporate offer to sell, by tender, the management rights.

A sale was completed in the 2013-14 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 102-25(3)

Income Tax Assessment Act 1997 subsection 104-10(1)

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

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1936 subsection 160M(6)

Reasons for decision

Under section 100-20 of the ITAA 1997, an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. 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.

CGT event D1

Subsection 104-35(1) of the ITAA 1997 states that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. The time of the event is when you enter into the contract or create the other right.

The Replacement Explanatory Memorandum to the Taxation Laws Amendment Bill (No.4) 1992 (EM) explains the operation of amendments to former subsection 160M(6) of the Income Tax Assessment Act 1936 (ITAA 1936). Former subsection 160M(6) of the ITAA 1936 was replaced with section 104-35 of the ITAA 1997 (CGT Event D1) as a consequence of the rewrite of former subsection 160M(6) under the Tax Law Improvement Project. The EM states, in part, that:

The principal amendment proposed by the Bill will clarify the operation of subsection 160M(6). The effect of the amendment will be that where a person creates an incorporeal asset (an asset other than a form of corporeal property) in another person, any consideration received by the first-mentioned person for creating the asset, less incidental costs, will be a capital gain to that person.

By way of clarification, the EM further states that:

Corporeal property is any property which has a physical or tangible existence, such as land or material goods. An incorporeal asset (an asset other than a form of corporeal property), therefore, is any asset (as defined in section 160A) of a non-physical or intangible nature. Examples include rights under a contract, a patent and goodwill. As a result of the amendment proposed to the definition of "asset", new subsection 160M(6) will also apply to the creation of legal or equitable rights that are not a form of property.

The new provisions are intended to apply to a wide range of circumstances where a person receives consideration for creating incorporeal assets in another person….

The EM provides examples of when new subsection 160M(6) of the ITAA 1936 will apply, and includes where a property owner grants management rights over the property.

CGT event A1

Subsection 102-25(3) of the ITAA 1997 provides that CGT event D1 will not be used where another CGT event applies.

Pursuant to subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 states:

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Application to your circumstances

In this case, you entered into a contract for the sale of management rights. We consider that rather than disposing of an asset the Body Corporate have created an asset in the purchaser, being the right to act as letting agent. Consequently, it is considered that CGT event D1 rather than CGT event A1 happens at the time of the creation of the right in the purchaser.

As the rights were created at the time of the contract, the capital gain cannot be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.