Edited version of your written advice

Authorisation Number: 1013048344280

Date of advice: 21 July 2016

Ruling

Subject: Market Value of CGT Asset at time of acquisition.

Acquisition of land as a result of amalgamation of two clubs and subsequent sale of the land by Club A in 2015.

Question 1

Does the cost base market value substitution rule under section 112-20 of the ITAA 1997 apply in relation to the cost of the land as contained in the Certificate of Title in the relevant State?

Answer

Yes

This ruling applies for the following periods:

01/07/2015 - 30/06/2016

The scheme commences on:

20 May 2002

Relevant facts and circumstances

Club A and Club B decided to amalgamate.

Negotiations lead to the formation and execution of the Amalgamation Agreement.

Following compliance with the required amalgamation process, and adoption and passing of the necessary respective members' resolutions, the Amalgamation Agreement was entered and was duly executed and signed in 20XX.

The amalgamation was conditional subject to a number of requirements, approvals, and obligations given and undertaken by both clubs.

One of the undertakings was by Club A in relation to the debt of Club B. At the time of the amalgamation discussions and at the time of signing the Amalgamation Agreement, Club B had a number of outstanding liabilities.

Club A guaranteed payment of all debts of Club B until such time Club B passed a special resolution to go into voluntary liquidation. This undertaking was also required and requested to assist the liquidator to fulfil his or her undertaking.

Club A then made a loan to Club B to enable it to pay its debts and to provide for the need for some working capital.

Following amalgamation, Club B by special resolution was placed into voluntary liquidation.
A liquidator was appointed and all liabilities and liquidation expenses were paid. Club B was then wound up.

As part of the process of winding up of Club B and its amalgamation with Club A, the Liquidator completed and lodged the document titled "TRANSFER", as required under the Relevant Property Act 1900, in 20YY and transferred the land it owned, contained in the Certificate of Title in the relevant State, to Club A.

The acquisition date Club A acquired the land from Club B is 20YY.

The transfer of the land to Club A, was as a result of the decision to amalgamate and was not at arm's length. At the time the transfer took place, no valuation was obtained to confirm or determine the cost base of the land.

The applicant states, the land was never a 'Core Property" of Club B or Club A, as defined in section 41J of the Registered Clubs Act 1976 (relevant State). Therefore no valuation was obtained to confirm or determine its market value, which would indicate the cost base of the land at the time of transfer.

No consideration was placed on the land and no money was paid or exchanged in relation to the transfer of the land to Club A.

No Stamp Duty was paid on the transfer of the land as it was exempt under section 65 of the Duties Act 1997 (relevant State).

The transfer of the land was recorded for stamp duty purposes to be pursuant to the application of section 17A of the Registered Clubs Act 1976 (relevant State).

Club B, during its existence and operation as a separate club, was exempt from income tax.

Club A is and continues to remain a registered club under the Registered Clubs Act 1976 (relevant State).

Club A subsequently sold the land contained in the Certificate of Title in the relevant State, in 20AA to an unrelated third party under an arm's length contract of sale.

Club A did not obtain a retrospective valuation for the land at the time of the sale to the third party to determine its market value at the time of acquisition in 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 112-20(1)

Income Tax Assessment Act 1997 Section 112-20(1) (c)

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Sub-section 100-20(1),

Income Tax Assessment Act 1997 Divisions 100, 103, 104, and 110

Reasons for decision

The land in the Certificate of Title in the relevant State, owned and sold by the Club A, is a CGT asset.

The sale of the land in the Certificate of Title in the relevant State, by the Club A to an unrelated third party, in 20AA gave rise to a CGT Event A1.

Therefore a CGT Event A1 happened to Club A in 20AA, by application of section 104-10 of the ITAA 1997, when the property was sold to the unrelated third party.

For the purpose of determining whether Club A has made a capital gain or a loss as a result of the disposal of its CGT Asset, pursuant to the application of Divisions 100, 103, 104, and 110 of the ITAA 1997 of the Capital Gains Tax regime, one factor Club A must determine, is the cost base of the disposed CGT Asset.

The transfer of the land from Club B, as a result of it being wound up, to Club A, was not an arm's length transaction. No money was paid, or required to be paid by Club A for the land, and no property was given to acquire it, therefore sub-section 112-20(1) of the ITAA 1997 will apply to determine the first element of the cost base of the land.

As stated under paragraph 112-20(1)(c) of the ITAA 1997, the first element of the cost base of a CGT Asset acquired from another entity where the acquisition was not under an arm's length dealing is the market value at the time of acquisition.

As the time of acquisition of the land by Club A was in 20YY, Club A must obtain a retrospective valuation for the land, from a qualified valuer, to confirm the market value at the time of acquisition.