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Edited version of private advice
Authorisation Number: 1051518049761
Date of advice: 20 May 2019
Ruling
Subject: Strata title conversion and dividends
Question 1
Will the cancellation of the shares, at the point of deregistration, be a CGT event for the taxpayer and, if so, will the rollover provisions contained in section 124-190 of the Income Tax Assessment Act 1997 (ITAA 1997) apply?
Answer
Yes. The conditions in section 124-190 are met. The capital gain or loss the taxpayer makes from surrendering the shares in the company is disregarded. Since the shares were acquired after 20 September 1985, the first element of the cost base and reduced cost base of the stratum unit is the shares' relevant cost base as at the date on which the company transfers the stratum unit to the taxpayer. In addition, the first element of the cost base and reduced cost base of the new stratum unit includes any amount the taxpayer will pay to acquire the stratum unit.
Question 2
Will the proposed transfer of a stratum unit to the taxpayer be considered a return of capital and if so, will there be any assessable dividend component of the distribution pursuant to paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936?
Answer
No. The taxpayer's acquisition of stratum unit title in exchange for the cancellation of the shares in the company is not considered a dividend under section 6(1)(d) of the ITAA 1936.
Question 3
Will the transfer of strata title result in a deemed dividend under section 109C of the ITAA 1936?
Answer
No. It is considered that this transfer of property is caught by the CGT provisions rather than as a tax free distribution profits from the company. The transfer of strata title will not result in a deemed dividend under section 109C of the ITAA 1936.
Question 4
Will any value of the strata title being transferred be considered a deemed dividend under section 47(1) of the ITAA 1936?
Answer
No. The value of the strata title being transferred will not be considered a deemed dividend under section 47(1) of the ITAA 1936 because the net capital gain would be rolled over under section 118-42 of the ITAA 1997.
This ruling applies for the following periods:
Year ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The Company applied for registration as a Proprietary Company. The objectives of the company were to purchase and develop a land and arrange for the sale of the home units and the utility lots contained in the building, and thereafter, manage and maintain the building as a whole.
The Company purchased a property which has a building with a number of units. This is the only asset owned by the company.
The Company's Articles of Association (Constitution) had the effect of identifying and dividing the lot entitlement according to share groups. It states that only the owner of the shares pertaining to a home unit shall be entitled to hold shares which grant any rights in respect of a utility lot.
The Constitution also stated that each Share Group Holder is entitled to the exclusive right to use, enjoy and occupy the corresponding home unit and/or utility lot together with the right to use the common property with all others similarly entitled.
A share group was issued in your name which granted you the right to enjoy a unit from the building. The unit has been your main residence since the company acquired the property.
Strata Title Subdivision
The company lodged for a strata plan. The property was subdivided into stratum units and a common property.
A certificate of title for the common property was issued to the Owners Corporation. The certificates of title for the stratum units were created and issued in the name of the company.
The company will transfer the stratum unit title for the relevant unit in your name.
The company will apply to ASIC to be voluntarily deregistered.
The company does not have other distributions to shareholders.
You will choose to exercise rollover relief in accordance with section 124-190 of the ITAA1997.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 6(1)
Income Tax Assessment Act 1936 section 6(4)
Income Tax Assessment Act 1997 section 124-10
Income Tax Assessment Act 1997 section 124-190
Income Tax Assessment Act 1936 section 47(1)
Income Tax Assessment Act 1936 subsection 47(1A)
Income Tax Assessment Act 1936 section 109C