Edited version of private advice

Authorisation Number: 1051577652793

Date of advice: 18 September 2019

Ruling

Subject: Capital gains tax

Question

Will the capital gains tax (CGT) rollover relief under section 124-190 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the apartments with the owners having a pre-CGT asset following the subdivision?

Answer

Yes.

Question

Is the recently constructed apartment an asset acquired before 20 September 1985?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2020

The scheme commenced on

1 July 2019

Relevant facts

Entity A, entity B and entity C purchased as tenants in common in equal shares a residential property prior to 20 September 1985. The owners had apartments constructed before 1985.

The owners had another apartment recently constructed. The construction of this apartment commenced in late 20XX and is now completed. The cost being over $200,000 is shared jointly.

All the existing apartments have been leased.

While there was no written agreement originally in place each owner has the exclusive right to receive rental income from the tenants in designated apartments.

Renovation work has been carried out at the complex. After the renovations, each of the existing lots are of approximate equal value. The renovations carried out to the apartments did not exceed the improvement threshold. The owners carried out the renovation to their respective lots at their own cost.

Information provided shows rental income for specific apartments going to a specific owner.

The owners have entered into a Deed of Partition.

As outlined in the Deed of Partition, the owners propose to register a strata sub-division in respect of the property.

As and from the date of the Deed, each party will be entitled to the rents and profits and will be liable for all rates, water sewerage and drainage service and usage charges, land tax and all other periodic outgoings of the lots in accordance with the partition.

Entity A died recently.

Where an owner dies before the date of transfer, the executor of the estate shall be bound by the Deed of Partition.

The new lot is held in equal shares as tenants in common.

It is estimated that the cost base for the new apartment will be greater than 5% of the capital proceeds from the CGT event in respect of the whole property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-70

Income Tax Assessment Act 1997 Section 118-42

Income Tax Assessment Act 1997 Section 124-190

Reasons for decision

Capital gains tax provisions

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens.

Under section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset.

A capital gain or capital loss is disregarded if you acquired the asset before 20 September 1985.

Strata title conversion

Under section 124-190 of the ITAA 1997, you can choose to obtain a rollover 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.

Any capital gain or loss made as a result of the transfer of a stratum unit is disregarded (section 118-42 of the ITAA 1997).

In Taxation Ruling TR 97/4 Income tax: capital gains: roll-over relief for buildings subdivided under strata title law into stratum units and common property the Commissioner discusses the application of the corresponding provisions of Income Tax Assessment Act 1936 (section 160ZZPG) to strata title conversions involving tenancy in common arrangements.

Whether tenants in common have a right to occupy a unit in a building is a question of fact. Where all unit purchasers own the whole of the premises as tenants in common and have collateral agreements granting participants exclusive occupancy, use and enjoyment rights over particular units, then the rollover is generally available. Such collateral agreement may be evidenced by a written document or may be demonstrated if, immediately before the subdivision and transfer process, the parties physically occupied particular units or received rental income in their own right from the renting of particular units rather than a share of rental income jointly received.

In your case it is considered that as the various owners were entitled to rent from particular units/apartments, there has not been a material change either in the identity of the persons who hold interests in the units before the conversion and those who hold interests in the stratum units after the conversion.

As highlighted in TR 97/4, where the original asset is acquired before 20 September 1985, the Commissioner will treat the asset acquired after the strata title conversion as also being a pre-CGT asset.

The requirements under section 124-190 of the ITAA 1997 have been met for the specified apartments, therefore these apartments remain pre-CGT assets after the subdivision into stratum units.

New apartment - separate asset

Subdivision 108-D of the ITAA 1997 outlines situations when some assets become separate CGT assets. For CGT purposes there are exceptions to the common law principle that what is attached to the land is part of the land and rules about when a capital improvement to a CGT asset is treated as a separate CGT asset.

Section 108-70 of the ITAA 1997 provides information on when a capital improvement is a separate asset. Subsection 108-70(2) of the ITAA 1997 states that a capital improvement to a CGT asset (the original asset) that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is:

(a)  more than the improvement threshold for the income year in which the event happened; and

(b)  more than 5% of the capital proceeds from the event.

The improvement threshold for 2018-19 financial year was $150,386. The improvement threshold is indexed annually (section 108-85 of the ITAA 1997).

In this case, you acquired the land prior to 20 September 1985 (pre-CGT) and construction of a new lot 10 commenced in 20XX (post-CGT). As the cost base of this lot is more than the relevant threshold and estimated to be more than 5% of the capital proceeds, it is considered to be a separate CGT asset from the original land.

Therefore any capital gain/loss made on a future CGT event in relation to the lot will not be disregarded, as it is not a pre-CGT asset.