Edited version of private advice

Authorisation Number: 1051788808412

Date of advice: 8 December 2020

Ruling

Subject: Subdivision of land and pre-capital gains tax status

Question 1

Will the subdivision of land held by X Pty Limited affect its pre-capital gains tax status?

Answer

No.

Question 2

Will the disposal of land from X Pty Limited to a new company be exempt from capital gains tax?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 20 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Relevant entities

•         X is the Trustee of the X Trust (X).

•         X and X are the Directors of X.

•         The X owns all four (4) ordinary shares X beneficially and has done so since shortly after the X was settled on X 19XX.

•         All shares carry the same interests and voting rights.

•         X was incorporated in State A on X 19XX.

•         X's share registry information as per the Australian Securities and Investments Commission (ASIC) records is incorrect. The Directors will rectify this error as soon as practicable, such that on completion of the rectification exercise the ASIC records will correctly reflect that the X owns all four shares in X beneficially.

The Land

•         X owns 100% of the interest in a property containing a X quarry land (the Quarry).

•         The entire property containing the Quarry is hereafter referred to 'the Original Property'.

•         The Original Property is all held on one title.

•         As per its 30 June 20XX balance sheet, X also owns various other assets, including other real property, cash in bank accounts, unsecured loans, listed equities, and interests in XXX Trust Funds

Pre-CGT status

•         Apart from the four ordinary shares issued to X on X 19XX, there have been no other forms of equity issued by X.

•         The Original Property was acquired by the X family in 18XX and has been held continuously within the family since then.

•         There have been no changes to the beneficiaries of the X since it was settled on X 19XX.

•         X acquired the Original Property before 20 September 1985, and both the legal and beneficial ownership of the Original Property has not changed since it was acquired.

•         The Trustee of the X has held an indirect interest in the Original Property through holding 100% of its shares for the beneficiaries of the X.

•         All income and capital distributions made by the X since establishment have been ultimately made to natural persons who are members of the X family, and specifically those who are eligible beneficiaries under the X Deed.

The proposed restructure

As part of the family's succession plans, the following steps are proposed (collectively, the Proposed Restructure):

•         The Original Property will be subdivided into two blocks, with the result of each block being registered on its own separate title, i.e. the Quarry and what is hereafter referred to as 'the XXX Land'.

•         Following subdivision, X will own 100% of the legal and beneficial interest in each of the Quarry and the XXX Land.

•         Following subdivision, the Quarry's land area is expected to be X hectares.

•         A new company (NewCo) will be incorporated, with X owning 100% of its shares (and with its Directors to be determined).

•         Shortly after the incorporation of NewCo, X and NewCo will form a consolidated group for income tax purposes.

•         X will then dispose of 100% of its interest in the Quarry to NewCo.

•         X will continue to own 100% of the interest in the Biobank Land.

•         It is possible that in the future, a X business will be established and operated on the Quarry.

The family's succession plans are the primary driver for undertaking the Proposed Restructure. It is expected that on completion of the Proposed Restructure the Quarry and the XXX Land will be held by different companies though both will remain within the same tax consolidated group

This in turn will allow for increased business efficiency and enhanced asset protection for the X family, especially as the patriarch and matriarch continue to execute on their personal and business succession plans to the next generation of the X family.

All entities involved in the Proposed Restructure are ultimately owned by members of the X family.

Relevant legislative provisions

Subsection 104-10(1) Income Tax Assessment Act 1997 (Cth)

Subsection 108-70(2) Income Tax Assessment Act 1997 (Cth)

Section 112-25 Income Tax Assessment Act 1997 (Cth).

Section 701-1 Income Tax Assessment Act 1997 (Cth).

Section 706-60 Income Tax Assessment Act 1997 (Cth).

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for X Pty Limited as Trustee of the X and X (the Taxpayers).

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Will the subdivision of land held by X affect its pre-capital gains tax status?

Summary

No.

Detailed reasoning

The subdivision of the Original Property means that for CGT purposes, the original CGT asset will be split into two new assets (i.e. the Quarry and the XXX Land respectively). However, subdividing the Original Property does not itself give rise to a CGT event, as per subsection 112-25(2). Therefore, there will be no CGT implications as X will continue to have legal and beneficial ownership of 100% of the interest in each of the Quarry and the XXX Land.

The pre-CGT status of each of the Quarry and the XXX Land will be preserved. This is consistent with the Commissioner's view as per paragraph 1 of CGT Determination TD 7: Capital Gains: What are the CGT consequences of sub-dividing pre-CGT land?

In addition, the cost base of the Original Property is divided between the two new assets on a reasonable basis in accordance with subsection 112-25(3) of the Income Tax Assessment Act 1997 (Cth).

Question 2

Will the disposal of land from X Pty Limited to a new company be exempt from capital gains tax?

Summary

Yes.

Detailed reasoning

Formation of tax consolidated group

On the formation of an income tax consolidated group, it will be necessary to prepare allocable cost amount (ACA) calculations in accordance with section 705-60 of the Income Tax Assessment Act 1997 (Cth), to determine new tax costs of assets that a subsidiary brings into a consolidated group and also to determine if a CGT event happens at this time.

As NewCo (being the subsidiary) would own no assets upon formation of the consolidated group, the result of any such ACA calculations is expected to give rise to an ACA result of $0. This means the formation of the consolidated group should not give rise to a CGT event.

Sale of the Quarry to NewCo

The disposal of the Quarry by X to NewCo means that CGT event A1 happens, as per subsection 104-10(1) of the Income Tax Assessment Act 1997 (Cth).

However, the operation of the single entity rule at section 701-1 of the Income Tax Assessment Act 1997 (Cth) means that if one entity disposes of a CGT asset to another entity within the same income tax consolidated group, this does not give rise to a CGT event. This is because X will be taken to the owner of the Quarry both before and after the disposal. Accordingly, there are no income tax consequences of any such disposal.

This is consistent with the Commissioner's view as per paragraph 9 of Taxation Ruling TR 2004/11: Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997.

Any capital improvements made to the Quarry will be considered post-CGT assets.