Edited version of private advice

Authorisation Number: 1051715123706

Date of advice: 15 July 2020

Ruling

Subject: Small business concessions

Question 1

Will the conversion of the Crown lease to freehold title be treated as one asset for the purposes of the 15-year ownership period set out in paragraph 152-105(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the conversion of the Crown lease to freehold title results in the 15-year ownership period not being met, will section 152-115 of ITAA 1997 apply to continue the ownership period?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have held a perpetual lease over Crown land for over XX years.

You conduct a business using the land.

The Certificate of Title certifies that the person described in the First Schedule is the registered proprietor of an estate in fee simple (or such other estate or interest as is set forth in that Schedule) in the land within described subject to such exceptions, encumbrances, interests and entries as appear in the Second Schedule.

The First Schedule lists the estate as being a Perpetual Lease with you being noted as joint tenants.

The Second Schedule states that the lease is subject to the provisions of the relevant state government lands act.

You are currently working with the state government to purchase the freehold title to the land.

The size and dimensions of the land will not change after the conversion to freehold title.

Following the conversion to freehold, you intend to subdivide and sell a portion of the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 124

Income Tax Assessment Act 1997 Subdivision 124-A

Income Tax Assessment Act 1997 Section 124-10

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Paragraph 124-70(1)(d)

Income Tax Assessment Act 1997 Subdivision 124-J

Income Tax Assessment Act 1997 Section 124-575

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Paragraph 152-105(b)

Income Tax Assessment Act 1997 Section 152-115

Reasons for decision

Question 1

Division 124 of the ITAA 1997 contains the capital gains tax (CGT) replacement asset roll-over provisions.

Subdivision 124-A of the ITAA 1997 provides for a roll-over when your ownership of a CGT asset ends (the original asset) and you acquire one or more replacement assets (the new asset(s)).

A capital gain or capital loss you make from the original asset is disregarded.

The usual CGT acquisition rules apply in that you are taken to have acquired the new asset on the actual day of acquisition, and the first element of the new asset's cost base is the original asset's cost base worked out when your ownership of it ended.

Subdivision 124-J of the ITAA 1997 confirms that there is a roll-over if you hold a Crown lease and you surrender it and are granted an estate in fee simple (the new right). The new right must be granted in one of the listed ways, one of which is by converting the original right to an estate in fee simple (section 124-575 of the ITAA 1997).

In your case, you have used land in your business that is subject to a Crown lease and the lease is being converted to freehold title (an estate in fee simple).

Therefore, the roll-over under subdivisions 124-A and 124-J of the ITAA 1997 will apply when the freehold title is granted so that a capital gain or capital loss you make from the original asset is disregarded and you will be taken to have acquired the new asset (the freehold title) on the actual day of acquisition.

Following the conversion to freehold, you intend to subdivide and sell a portion of the land which will result in CGT event A1 happening.

Where the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied, the CGT 15-year exemption for individuals in section 152-105 of the ITAA 1997 may be available.

Paragraph 152-105(b) of the ITAA 1997 states that the individual must have continuously owned the CGT asset for the 15-year period ending just before the CGT event.

However, in your case the 15-year ownership period of the new CGT asset will only commence after the conversion from leasehold to freehold title occurs.

Therefore, the land will not be treated as one asset for the purposes of the 15-year ownership period as set out in paragraph 152-105(b) of the ITAA 1997.

Question 2

Where a CGT asset is compulsorily acquired, lost or destroyed as specified in subdivision 124-B of the ITAA 1997, section 152-115 of the ITAA 1997 operates so that paragraph 152-105(b) of the ITAA 1997 will apply as if you had acquired the new asset when you acquired the original asset.

In your case, the most relevant provision in subdivision 124-B of the ITAA 1997 is paragraph 124-70(1)(d) which states that a rollover may be available if a lease is granted by an Australian government agency (which includes a state government agency or authority) and the 'lease expires and is not renewed'.

However, this provision will not apply as subdivision 124-B of the ITAA 1997 contemplates non-voluntary situations and you are entering into a voluntary transaction involving a perpetual lease which is being terminated by mutual consent.

Therefore, as section 152-115 is not applicable in your case, paragraph 152-105(b) of the ITAA 1997 will not apply as if you had acquired the new asset (the freehold title) when you acquired the original asset (the Crown lease).