Edited version of your written advice

Authorisation Number: 1051463179078

Date of advice: 11 January 2019

Ruling

Subject: Subdivision of pre-CGT asset that was partially disposed of

Question

Will the sale of all of the subdivided land by Couple 1 be exempt from capital gains tax (CGT)?

Answer

No

This ruling applies for the following periods:

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Couple 1 purchased more than two hectares of land on one title prior to 20 September 1985.

The property was purchased as joint tenants with the intention of building their sole and principal residence and living there for all of the foreseeable future.

The couple built their private home on the part of it after 20 September 1985.

They sold part of the land to Couple 2 after 20 September 1985. Their names were added to the title as it could not be subdivided at the time.

The block has now been divided into two lots and each couple own one of the lots. The lots are each greater than two hectares in size.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-7.

Reasons for decision

Section 108-7 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

The Butterworths Australian Property Law Dictionary, 1997, P E Nygh & P J Butt Eds, Butterworths, Sydney defines 'tenancy in common' as:

A type of co-ownership where two or more persons own distinct interests in the same piece of property. The tenants in common hold undivided shares, possessing the property in common and without exclusive possession of any part of it. The shares may be in different proportions. Tenants in common may deal with their respective shares as they wish during their lifetime, and usually may devise them by will...

In this case, Couple 1 purchased a block of land prior to 20 September 1985, around 198X. In about 199X, half of the block was purchased by another Couple 2. Since Couple 2 purchased half the land, Couple 1 have treated the front half/better half as their own, whilst the other couple have treated the back half/worse half as their own. Couple 1 built their main residence on their half and the Couple 2 did the same on their half.

Couple 1 have determined that they have a distinct one-half share (their CGT asset) in the whole property and Couple 2 has a distinct one-half share (their CGT asset) in the whole property. However, those two shares are, as noted previously, undivided or not physically identifiable. Couple 1 and Couple 2 are tenants in common of the entire property. It is therefore incorrect to treat (the now) Lot A as belonging to Couple 1, and it is equally incorrect to treat Lot B as belonging to Couple 2. This legal outcome remains, notwithstanding that Couple 1 have until now treated Lot A as their own and made improvements upon it whilst Couple 2 has done the same with regard to Lot B.

A case with some similarities is Johnson v. FC of T 2007 ATC 2161 (Johnson’s case). Although dealing with a joint parcel of shares, it was held that having a one half interest in a parcel of shares did not equate to having exclusive ownership of one half of the total number of shares. The taxpayer submitted that, notwithstanding that the shares were registered in joint names, he and his brother always understood that they each held 50% of the shares; the transfer into individual names merely gave effect to the underlying reality and did not amount to a disposal. The mother also gave evidence that it was her intention that each son would take half the number of shares.

The judge in Johnson’s case used the following reasoning:

Section 108-7 provides that individuals holding a CGT asset as joint tenants are treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset. Meaning in this case that each share was compromised of two assets, one held by each other. Dividing the parcel in two for the purposes of a transfer to each joint owner effectively required those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they were acquiring. The result is that the rearrangement and reallocation of the CGT assets constituted a disposal of CGT assets under section 104-10 (CGT event A1) and tax is levied on the capital proceeds i.e. the market value of the interest acquired in the shares less the cost base. This being consistent with the Commissioner's view in Taxation Determination TD 92/148.

Similarities are drawn between this case and TD 92/148. Both couples have always had an understanding that their half of the block of land belonged to them exclusively. 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 amount to a change in the legal and beneficial ownership of those interests.

The following example from TD 92/148 can be compared to the situation presented:

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.

Upon the subdivision, Couple 1 will dispose of their 50 percent share in Lot B to Couple 2, thereby triggering CGT event A1 as there will be a change of ownership - in both beneficial and legal terms - of that 50 percent share in Lot B. In a concurrent and separate transaction, Couple 1 will acquire a 50 percent share in Lot A, namely the share in Lot A that was previously owned by Couple 2. The converse applies in the case of Couple 2; they will dispose of a 50 percent share in Lot A to Couple 1 (again triggering CGT event A1), and will concurrently and separately acquire a 50 percent share in Lot B from Couple 1.