Edited version of private advice

Authorisation Number: 1051822504940

Date of advice: 31 May 2021

Ruling

Subject: CGT - dissolving/cancellation of strata title

Question

Will the dissolution/cancellation of the existing Strata Title trigger a capital gains tax event?

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

31 January 20XX

Relevant facts and circumstances

After 20 September 1985, you, being Person A and Person B, and another couple purchased the Property with an ownership share split of 25% for each person.

A building (the Building) is located on the Property which contains several residential units (the Units) that are owned under the Strata Title. Several garages and carports are located at the rear of the Property with a laneway at the rear of the Property. A laundry and toilet are attached to the carport. There is a grassed area on each side of the Building and at the rear of the Building to the garage and carports.

The Units have been held for investment purposes and have always been rented.

After several years the other couple sold their shares in the Property to you in equal shares, which resulted in you each having an equal share in the strata titles of the Units.

You were divorced and as part of the divorce settlement the Units were split equally between you in accordance with a Court Order and in accordance with the Court Order the ownership interests in the Units were transferred to you with each of you solely owning the same number of units that continued to be held on strata title.

The strata-body is self-managed by you and you do not collect any strata fees.

You are considering developing the Property (the Development) during the period covered by this ruling which will involve:

•         the Strata Title being dissolved/cancelled with the Property being held on Torrens Title in equal shares by you

•         the demolition of the current six units

•         four stand-alone residential dwellings will be constructed, which will be identical in size and value; and

•         the Property will be subdivided into four Torrens Title blocks with a newly constructed dwelling located on each one.

At the end of the Development you will each have an equal 100% ownership interest in several dwellings and the subdivided lots on which they are located.

Assumption

For the purpose of this ruling it is assumed that the dissolution/cancellation will occur during the period of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

The capital gains tax (CGT) provisions in Division 104 of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) contain 53 CGT events.

In your situation only CGT event A1 under 104-10 of the ITAA 1997 may apply. You dispose of a CGT asset where there is a change of ownership under section 104-10 of the ITAA 1997.

Section 108-5 of the ITAA 1997 defines a CGT asset as:

(a)  any kind of property; or

(b)  any legal or equitable right that is not property.

Note 1 after subsection 108-5(2) of the ITAA 1997 gives examples of CGT assets. One of the examples is land and buildings. Therefore, the asset in question is a CGT asset, and it needs to be determined if the dissolution/cancellation of the Strata Title results in a CGT event A1 occurring.

Section 112-25 of the ITAA 1997, regarding split, changed or merged assets, states, if a CGT asset is split, or two or more CGT assets are merged, and you are the beneficial owner of the original asset(s) and the new asset(s), no CGT event happens.

In your case, you have jointly owned all of strata titles of the Units on the Property since 2016, with you each owning the same number of Units. You propose to dissolve/cancel the current Strata Title and hold the entire property under a Torrens Title. You will then continue with the Development during the period covered by this ruling.

You have owned your interests in the Property since 20XX in equal shares. Therefore, when the Strata Title for the Property is dissolved/cancelled your ownership interests in the Property will not change with you continuing to hold an equal share of the Property after that has occurred.

As there will not be any change in beneficial ownership of the land/Property, in accordance with subsection 104-10(2) of the ITAA 1997, CGT event A1 does not happen due to you each being left with an interest in the land/Property that is similar to the interest you held before the Strata Title is dissolved/cancelled.

Therefore, the act of dissolving/cancelling the Strata Title will not trigger any CGT events under section 104-5 of the ITAA 1997, as there will be no disposals, cancellations or similar endings of any CGT asset.