Edited version of private advice

Authorisation Number: 1052023916678

Date of advice: 28 September 2022

Ruling

Subject: Income tax - capital gains tax

Question 1

Will the subdivision of a property into separate Torrens titles be considered a Capital Gains Tax (CGT) event in accordance with section 112-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

When you are the beneficial owner of the original asset and the CGT asset changes in whole or in part into a new asset of a different nature, the splitting, change or merge is not considered a CGT event when you remain the beneficial owner. The subdivision of the property does not change the beneficial owner of the original or new asset, therefore in accordance with 112-25 of the ITAA 1997, no CGT event happens.

Question 2

Will the transfer of separate titles to shareholders be a CGT event and, if so, will the capital gain or loss be disregarded in accordance with section 118-42 of the ITAA 1997?

Answer

Yes.

You can disregard any capital gain or loss made from transferring stratum units where you own land on which there is a building, subdivide the building into stratum units and transfer each unit to the entity who had the right to occupy it prior to the subdivision. You demolished the exiting building on land you own, built a new two storey attached dual occupancy with garage and subdivided that building into stratum units. The units will be transferred to the individuals who had the right to occupy it prior to the subdivision. Accordingly, any capital gain or loss can be disregarded in line with section 118-42 of the ITAA 1997.

Question 3

Will the transfer of the stratum unit title result in a deemed dividend under section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

It is considered that the transfer of property is assessed under the CGT provisions and therefore included in your assessable income rather than as a distribution profit from the company. Accordingly, the transfer of strata title will not result in a deemed dividend under section 109C of the ITAA 1936.

Question 4

Can the shareholders choose to apply the CGT roll-over relief outlined under section 124-190 of the ITAA 1997 on the transfer of the respective sub-divided property to the respective shareholders?

Answer

Yes.

The shareholders meet the requirements set out under section 124-190 of the ITAA 1997 to be able to choose to apply the CGT roll-over relief available under that provision.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 202XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The company was formed for the purpose of establishing "a company title scheme' under which holders of each class of shares in the company are given a right to occupy a designated part of a building/s constructed on the parcel of land owned by the company.

The company purchased a property after 20 September 1985. It is the only asset owned by the company.

At the time of purchase the property contained a pre-existing residential dwelling and associated structures.

The company applied for and was granted development consent for the demolition of the pre-existing structures and construction of a new two-storey attached dual occupancy with garaging and associated works.

No proceeds were received for the demolition of the pre-existing dwelling and associated structures.

There are two classes of shares withing the company's constitution, A class and B class shares.

Entity 1 and 2 own x A class shares. Entity 3 and 4 own x B class shares.

The company constitution provides that each shareholder has an exclusive right to reside in and use a particular property. That is, the shares give each entity exclusive beneficial ownership in a particular property. The entities own the property via company title. This is an older form of ownership before strata title was introduced.

The company applied for and was granted development consent for the Torrens title subdivision of the existing dual occupancy into two separate lots. The building has no accompanying common property.

When registration of the subdivision occurs, the company will transfer the respective lots to the individual shareholders in accordance with their entitlements as the holders of their respective "A" and "B" Class shares. These are the same entities that have held their rights to occupy a particular lot/unit in the building before the subdivision.

No consideration is being paid for or received in relation to the transfer.

The shareholders will choose to exercise the rollover relief provided for in section 124-190 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-42

Income Tax Assessment Act 1997 section 124-190