Edited version of private advice

Authorisation Number: 1051619700221

Date of advice: 12 December 2019

Ruling

Subject: Capital Gains Tax on sale of land and factory complex

Question 1

Will the company be subject to capital gains tax (CGT) upon the sale of the Property, including the factory complex affixed to the Property in 19XX?

Answer

No

Question 2

>Has there been a change in majority underlying interests in the Property under Subdivision 149-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Relevant facts and circumstances

The Property

In 19XX the company was issued with a lease for special purposes by the Australian state under section 203(a) of the Land Act 1962-1975 to lease the Property. The lease was for a term of thirty years.

In early 19XX the final payment for the construction of a factory complex situated on the Property was made by the company to the builder.

In late 19XX, in response to the company's application for conversion of tenure of special lease to a perpetual lease, the company was issued with a perpetual suburban lease by the Land Administration Commission - Department of Lands pursuant to section 210 of the Land Act 1962-1978.

In late 19XX the company applied to have the perpetual lease deemed a lease for a term of years, and subject to a covenant entitling the company, as lessee, to a deed of grant in fee simple.

In early 19XX a letter from the Land Administration Commission - Department of Lands was issued to the company advising the purchase price of the Property and the options for when the new lease for a term of years may commence; & requesting a Notice of Election to be returned by the company.

The company provided the Land Administration Commission a notice of its election in accordance with the provisions of the Land Act 1962-1978 to proceed with its application to have the perpetual suburban lease a deemed a lease for a term of years, commencing January 19XX, including a covenant entitling the company to a deed of grant in fee simple; and made a payment to freehold the Property immediately.

In mid-19XX a letter from the Land Administration Commission - Department of Lands was issued to the company advising, in response to the company's Notice of Election, that the perpetual suburban lease was now deemed a lease for a term of twenty years, and subject to a covenant entitling the company to a deed of grant in fee simple. The purchase price of the Property was payable in annual instalments.

In 20XX the perpetual suburban lease was converted to freehold (Estate in Fee Simple).

Shareholders

During the period 19 September 1985 to current, there have been movements in the shareholdings of members in the company. Events which have resulted in movements in the shareholdings of members since 19 September 1985 are as follows:

1. a dividend in-specie share issue;.
2. the private sale of shares;
3. the issue of new shares; and
4. the death of members and the transfer of their shareholdings to their estate.

Of the current shares issued in the company, approximately 81.7% are held by shareholders who together held 100% of shares as at 19 September 1985 (or the beneficiaries of their estate in the case of those shareholders who are now deceased) and approximately 18.3% of the issued shares have been transferred to members who did not hold shares just before 20 September 1985 (or who were not beneficiaries of a deceased shareholder's estate). The percentage of issued shares held by shareholders or the estate of shareholders who together held 100% of shares in the company as at 19 September 1985 has never been less than 81.7%.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 subsection 108-55(2)

Income Tax Assessment Act 1997 section 124-575

Income Tax Assessment Act 1997 paragraph 124-575(2)(d)

Income Tax Assessment Act 1997 section 124-580

Income Tax Assessment Act 1997 section 124-595

Income Tax Assessment 1997 Subdivision 149-B

Income Tax Assessment 1997 section 149-15

Income Tax Assessment 1997 subsection 149-30(1)

Income Tax Assessment 1997 subsection 149-30(3)

Income Tax Assessment 1997 subsection 149-30(4)

Reasons for decision

Question 1

Summary

The company will not be subject to CGT upon the sale of the Property, including the factory complex affixed to the Property in 19XX.

Detailed reasoning

CGT - general

Section 102-20 of the ITAA 1997 provides that you can only make a capital gain or loss when a CGT event happens. The gain or loss is made at the time of the CGT event.

CGT event A1 happens when a person disposes of a CGT asset to someone else. You are deemed to have disposed of an asset if a change of ownership occurs from you to another entity (section 104-10 of the ITAA 1997). Generally, the time of the event is when you enter into the contract for the disposal.

You make a capital gain if the capital proceeds from the disposal of a CGT asset are greater than the asset's cost base. You make a capital loss if the reduced cost baseof the asset is greater than the capital proceeds.

Any assessable gain from a CGT event is included in your assessable income by section 102-5 of the ITAA 1997.

CGT assets and pre-CGT assets

When acquired before 20 September 1985, CGT assets are considered pre-CGT assets and generally, any gain or loss made from the disposal can be disregarded. This includes any capital gain or loss made as a result of CGT event A1 happening (subsection 104-10(5) of the ITAA 1997).

Land

When a Crown lease, defined in section 124-580 of the ITAA 1997 to include 'a lease of land granted by the Crown under an Australian law', is converted to a freehold title, a CGT event happens. You surrender a right (the Crown lease) and acquire a new right (the freehold title) as a replacement asset.

Pursuant to section 124-575 of the ITAA 1997, a replacement asset roll-over is available on the conversion of a Crown lease to a freehold title if all of the following applies:

a.     you hold a Crown lease over land;

b.     you surrender the Crown lease or it expires; and

c.      you are granted an estate in fee simple or a new Crown lease over the land (or both).

One of the ways in which any estate in fee simple may be granted is by conversion of a Crown lease to the estate in fee simple (paragraph 124-575(2)(d) of the ITAA 1997).

The roll-over is automatic and any capital gain or capital loss made from the original asset is disregarded.

Where the original Crown lease was acquired before 20 September 1985, the date of acquisition of the replacement asset is taken to be the date that the original Crown lease was acquired (section 124-595 of the ITAA 1997).

In this case, the company acquired the land under the Crown lease prior to 20 September 1985. The Crown lease was converted into a freehold title (an estate in fee simple) after 20 September 1985. Therefore, in accordance with section 124-595 of the ITAA 1997, the company is taken to have acquired the freehold title on the date that the Crown lease was originally acquired before 20 September 1985.

As a result, the Property will not be subject to CGT pursuant to subsection 104-10(5) of the ITAA 1997 when sold.

Factory Complex

According to subsection 108-55(2) of the ITAA 1997, a building that is constructed on land that you acquired before 20 September 1985 is only taken to be a separate CGT asset from the land if you entered into a contract for the construction on or after that day or, where there is no contract, the construction started on or after that day. Therefore, the factory complex constructed on the Property in 19XX is not taken to be a separate CGT asset to the Property and any capital gain or capital loss attributable to the future disposal of the factory complex would also be disregarded pursuant to subsection 104-10(5) of the ITAA 1997.

Question 2

Summary

There has been no change in the majority underlying interests in the Property as they continue to be held by ultimate owners who held them immediately before 20 September 1985.

Detailed reasoning

The provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of a non-public entity acquired before 20 September 1985 stops being a pre-CGT asset. This happens at the earliest time when the 'majority underlying interests' in the asset were not held by 'ultimate owners' who held majority underlying interests in the asset immediately before 20 September 1985 (subsection 149-30(1) of the ITAA 1997).

Section 149-15 of the ITAA 1997 relevantly provides:

(1) Majority underlying interests in a CGT asset consist of:

(a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

(2) An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

(3) An ultimate owner is:

(a) an individual; or

(b)...;

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (the new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown roll-over or because of the death of a person (the former owner), the new owner is treated as having held the underlying interest of the former owner for the period the former owner held them.

In this case, as ultimate owners (including the estate of ultimate owners) have more than 50% of the beneficial interests in the Property and more than 50% of the beneficial interests in any ordinary income that may be derived from the Property, the majority underlying interests in the Property continue to be held by ultimate owners who held majority underlying interests in the Property immediately before 20 September 1985. As a result, the Property has not stopped being a pre-CGT asset pursuant to subsection 149-30(1) of the ITAA 1997.