Edited version of private advice

Authorisation Number: 1051716308249

Date of advice: 20 August 2020

Ruling

Subject: Sale of airspace lot title - capital gains tax

Question 1

Will the pre-CGT status of the underlying CGT assets remain unaffected by the operation of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), such that:

(a) the Landowner is considered the 'ultimate owner' under paragraph 149-15(3)(b), and

(b) there will not be a change in the majority underlying interests held by the ultimate owners under subsection 149-30(1)?

Answer

Yes

Question 2

Will the creation of an airspace lot from the subdivision of each property result in any CGT event happening?

Answer

No

Question 3

Does CGT event A1 in subsection 104-10(1) of the ITAA 1997 happen on the sale of the airspace lot titles?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

1.            A Landowner owned Property A and Property B. Property A was acquired before 20 September 1985 and Property B was acquired after 19 September 1985.

2.            The Landowner is an entity whose constituent documents prohibit it from making distributions to its members and is treated as if it is a company.

3.            Landowner is seeking to split the airspace attached to each property under a subdivision. The Subdivision will result in two airspace lots with separate titles registered with Land Title Office and two lots containing the remaining original parcels and existing buildings. On completion of Subdivision, Landowner will become the owner of all four separate lots.

4.            Once separate titles are registered, Landowner will dispose the airspace lots to a third party under a Contract of Sale. Landowner is not carrying on a business of property development.

5.            Under State legislation, landowners are permitted to subdivide their land in which the airspace attached to the land is split and new separate titles are registered for the new airspace lot and the remaining original parent lot. Ultimately, the landowner can also sell the airspace lot to another party or to protect their view and access to light.

Information provided

6.            You have provided the following documents in relation to the ruling request:

(a)          your private ruling application, and

(b)          supplementary information provided on various dates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Paragraph 108-5(1)(a)

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Subsection 112-25(2)

Income Tax Assessment Act 1997 Subsection 112-25(3)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 Subsection 149-15(1)

Income Tax Assessment Act 1997 Paragraph 149-15(3)(b)

Income Tax Assessment Act 1997 Subsection 149-30(1)

Reasons for decision

Question 1

Will the pre-CGT status of the underlying CGT assets remain unaffected by the operation of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), such that:

(a)          the Landowner is considered the 'ultimate owner' under paragraph 149-15(3)(b) of the ITAA 1997, and

(b)          there will not be a change in the majority underlying interests held by the ultimate owners under subsection 149-30(1) of the ITAA 1997?

Summary

Yes, the pre-CGT status of the underlying pre-CGT assets held by the Landowner will not be affected.

Detailed reasoning

1.            Division 149 of the ITAA 1997 contains the provisions under which an asset acquired before 20 September 1985 is treated as having been acquired after that date, that is, the asset stops being a pre-CGT asset.

2.            Applicable to Landowner is Subdivision 149-B of the ITAA 1997 as it examines when an asset of a non-public entity stops being a pre-CGT asset.

3.            'A factual test' is set out subsection 149-30(1) of the ITAA 1997 to determine when an asset of a non-public entity stops being a pre-CGT asset. Under the test, an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

What are the majority underlying interests?

4.            The 'majority underlying interests' in a CGT asset consist of more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and any ordinary income that may be derived from the asset.[1]

5.            Therefore, in considering whether the majority underlying interests in the pre-CGT assets of Landowner have changed, the Commissioner must determine who are the ultimate owners.

Who are the ultimate owners?

6.            The definition of an ultimate owner includes at paragraph 149-15(3)(b) of the ITAA 1997 a company whose constitutions prevent them from making any form of distribution to their members.

7.            In determining whether the Landowner satisfies the requirements of an ultimate owner it is necessary to consider the benefits which it provides to members, having regard to its objects and any relevant terms and conditions of membership.

8.            The landowner is governed by its constitution. The constitution contains a number of clauses that are in place to prevent distributions to its members. That is, there has always been a prohibition on members receiving distributions and this has always been adhered to.

9.            Based on the above, the Landowner is considered to be a company whose constitution prevents it from making any distribution whether in money, property or otherwise to its members. Therefore, the Landowner would meet the definition of an 'ultimate owner' in paragraph 149-15(3)(b) of the ITAA 1997.

10.         Subsection 149-30(1) of the ITAA 1997 provides that an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

11.         This means that ultimate owners who held majority underlying interests in an asset immediately before 20 September 1985 must retain those interests after that date, otherwise Division 149 will operate to convert the asset into a post-CGT asset at the time when the ultimate owner no longer holds a majority underlying interest in the asset.

12.         The Landowner is the owner of a pre-CGT property (Property A). As this property has not changed ownership since it was acquired before 20 September 1985, the property will retain its pre-CGT status. This is because there has not been a majority change (50% or more) in the ultimate owners who held underlying interest in the asset since 19 September 1985.

Question 2

Will the creation of an airspace lot from the subdivision of each property result in any CGT event happening?

Summary

Undertaking a subdivision to split the airspace attached to the land, to create two separate registered lots, will not result in a CGT event happening.

Detailed reasoning

13.         A 'CGT asset' is defined as any kind of property, or a legal or equitable right that is not property.[2]

14.         It is a long held view in Australian property law that ownership of land includes not only the physical surface but also the space (airspace) above and below the surface as necessary for the ordinary use and enjoyment of the land.

15.         In creating an airspace lot, a landowner can also utilise the right to the airspace for their own future development or convey it to others for a variety of commercial reasons, including to protect any view or access to light or to enable an investor to develop over the existing structure or to increase the development potential of their land.

16.         The airspace lots will be created by a Plan of Subdivision.

17.         The Landowner sought expert advice on subdivision and disposal of airspace above land in the relevant State. The following advice was provided to the Landowner:

·                The subdivision or splitting of lots which comprise volumetric airspace from existing parcels of land is permitted under the State legislation.

·                The airspace above the Landowner's land is attached to that land and can be subdivided in the same way that a parcel of land can be subdivided. The original land parcel is held by way of two separate titles rather than the original titles.

·                As the airspace lot is separate property title it can be sold and transferred like any other property title.

·                The split or the subdivision of the 'parent lot' allows the Landowner to deal with both the residual land lot and the airspace lot independently.

·                A plan of subdivision would be prepared by a qualified surveyor which is lodged with Land Authority for registration.

·                Upon registration, the 'parent lot' (existing asset) is split and two separate titles are created, being the airspace lot and residual lot containing the building. The Landowner remains the owner of both lots.

·                The Landowner may sell or dispose of the airspace lot in the same manner as any other land title, namely by enter into a contract of sale for the sale. The transfer of land is lodged with Land Authority for registration.

18.         The issue for consideration is whether airspace can be regarded in its own right as real property and be conveyed separately from the soil. Additionally, whether a subdivision splitting the original land parcel into lots, creating a separate airspace lot and a residual original land lot is permitted under the relevant State legislation.

19.         Subdivisions of land are governed by the relevant State Subdivision Act that defines 'Land' to include building and airspace. Information obtained from the Council confirms this type of subdivision is permitted under the State law. It is not dissimilar to a standard land subdivision to split a land parcel into multiple lots, except the lines of subdivision is above the ground instead of being on the surface of the ground usually limited in height and depth with reference to standard height datum.

20.         Based on the information that the Landowner has provided and the information the ATO obtained from the relevant Land Authority and other sources, it is clear that a property owner is able to subdivide the airspace above their land to create a separate airspace lot. Once subdivided, the airspace lot is given its own volume and folio identity and title which is registered with Land Titles Office. The airspace lot can be conveyed in a similar manner to a standard subdivided land lot. This means that the subdivided airspace lot exists as a separate item of real property. Therefore, as the airspace lot is regarded as property, it will fall within the definition of a CGT asset, as it is capable of assignment or transmission under paragraph 108-5(1)(a) of the ITAA 1997.[3]

CGT consequence on splitting of a CGT asset

21.         Section 112-25 of the ITAA 1997 states that when a CGT asset (the original asset) is split into two or more assets (the new assets), and you are the beneficial owner of the original asset and each new asset, the splitting or change is not a CGT event.[4]

22.         A subdivision of an original land parcel into two or more lots is a split of asset that is contemplated under section 112-25 of the ITAA 1997. As 'land' is defined in the subdivision legislation to include a building and airspace, the splitting of an airspace lot from the original land would fall within the operation of section 112-25 of the ITAA 1997.

23.         The Landowner is seeking to subdivide both Property A and Property B, each into two separate lots; the original land and building as one lot and the airspace above the building as a new separate lot, each with its own registered title with the Land Titles Office. As determined in Question 1, only Property A is a pre-CGT asset. Property B was acquired after 19 September 1985 and is therefore, a post CGT asset.

24.         The subdivision of airspace from the original land is not dissimilar to a standard land subdivision under the subdivision legislation. The original asset is divided into two or more assets (the subdivided lots) that are registered as separate lots. The splitting or subdivision of the above properties will not constitute a CGT event, but will result in two separate CGT assets. Each subdivided lot is taken to have been acquired by the owner of the original land parcel when that original parcel was acquired.[5] This means:

(a)          the airspace lot that comes from subdividing Property A will attain the pre-CGT acquisition date of the original land and building, i.e. will be considered a pre-CGT asset, and[6]

(b)          the airspace lot that comes from subdividing Property B will attain the post-CGT acquisition date of the original land and building, i.e. will be considered a post-CGT asset.

Apportionment of cost base

25.         When land is subdivided, subsection 112-25(3) of the ITAA 1997 provides a method statement to apportion the costs incurred in acquiring and subdividing the land across the subdivided lots.[7] The method statement provides that each element of the cost base and reduced cost base of the original asset at the time of the split is apportioned in a reasonable way.

Question 3

Does CGT event A1 in subsection 104-10(1) of the ITAA 1997 happen on the sale of the airspace lot titles?

Summary

The sale of the subdivided airspace lot will result in CGT event A1 happening.

Detailed reasoning

26.         Subsection 104-10(1) of the ITAA 1997 states that a CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether by some act or event or by operation of law.[8] The time of the event is when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs.[9]

27.         As discussed above, the two airspace lots that results from each subdivision are separate CGT assets.[10] The splitting of each property into two separate lots will not result in a CGT event happening, as there has not been a disposal of an asset at this point in time. As a result of the subdivision, all that has occurred is that the Landowner will become the registered owner of four lots, instead of two lots.

28.         Therefore, if the Landowner later enters into a Contract of Sale, the disposal of the airspace lots will result in CGT event A1 happening when the contract is executed between the parties.

29.         As determined in Question 1, the subdivision of Property A into two separate registered lots will result in both lots being a pre-CGT asset. Accordingly, any capital gain or loss that is made from disposing of this airspace lot will be disregarded.[11]

30.         However, the subdivision of Property B into two separate registered lots will result in both lots being a post-CGT asset. Accordingly, any capital gain or loss that is made from disposing of this airspace lot will not be disregarded.

[1] Subsection 149-15(1) of the ITAA 1997

[2] Section 108-5 of the ITAA 1997

[3] Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 1992 (Act 191 of 1992) confirms the view that property is generally regarded as something that is capable of assignment (at 65).

[4] Subsection 112-25(2) of the ITAA 1997

[5] Paragraph 2 of Tax Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?

[6] CGT Determination Number 7 Capital gains: What are the CGT consequences of sub-dividing pre-CGT land?

[7] TD 97/3 also states that if the original land is split into two or more lots and you are the beneficial owner of all the lots, you work out the cost base and reduced cost base of each new lot in accordance with the method statement in subsection 112-25(3) of the ITAA 1997.

[8] Subsection 104-10(2) of the ITAA 1997

[9] Subsection 104-10(3) of the ITAA 1997

[10] Paragraph108-5(1)(a) of the ITAA 1997

[11] Paragraph 104-10(5)(a) of the ITAA 1997