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Edited version of private advice
Authorisation Number: 1052200294446
Date of advice: 8 December 2023
Ruling
Subject: CGT - subdivision - disposal
Question 1
Will the subdivision of the Property into separate Torrens titles be considered a capital gains tax event in accordance with section 112-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Section 112-25 of the ITAA 1997 sets out what happens if a capital gains tax (CGT) asset is split into two or more assets, such as when a property is subdivided. The subdivision itself does not constitute a CGT event if there is no change of ownership.
Therefore, as the Company owned the Property prior to the subdivision and will own both Lot A and Lot Z after the subdivision, no CGT event will occur as a result of the subdivision as there will be no change of ownership.
Question 2
Can you disregard any capital gain made on the transfer of the titles for Lots 1 and 2 to the shareholders under section 118-42 of the ITAA 1997?
Answer
Yes.
A CGT event A1 will occur when the titles of the lots are transferred to the shareholders. However, under section 118-42 of the ITAA 1997, you can disregard any capital gain or capital loss made from the transfer of the titles because:
• You owned the Property on which the dual occupancy duplex is located
• You subdivided the Property into stratum units; and
• You will transfer the title of a unit, being a title in one of the two lots, to each shareholder in accordance with their right to occupy it just before the subdivision.
Question 3
Will the transfer of the stratum unit titles result in a deemed dividend under section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No.
Under section 109L of the ITAA 1936, a private company is not taken under to have paid a dividend under section 109C of the ITAA 1936 in relation to a payment the private company makes to an entity, to the extent that the payment would be included in the entity's assessable income apart from Division 7A of the ITAA 1936.
Subsection 109L(2) of the ITAA 1936 outlines that a private company is not taken under section 109C of the ITAA 1936 to pay a dividend because of a payment that the private company made to an entity to the extent that a provision of this Act (other than in Division 7A of the ITAA 1936) has the effect that the payment is not included in the entity's assessable income even though it would otherwise be included.
Therefore, as the shareholder's will be assessable under the CGT provisions in relation to the transfer of the titles of the lots into their names, the transfer of the titles by the Company to them will not be viewed as a deemed dividend in accordance with section 109C of the ITAA 1936.
This ruling applies for the following periods:
Income year ending 30 June 20XX
Income year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
The Company
The Company is a company limited by shares, which:
• Was formed for the purpose of establishing "a company title scheme' under which holders of each class of shares in the Company were given a right to occupy a designated part of a building/s constructed on the parcel of land owned by the Company (being the Property as discussed below)
• Has two different shares, being Class 'A' and 'B', and shareholders who each have equal voting rights and which can only be transferred as one parcel, being all of the Class of shares or no shares can be transferred.
Each shareholder will have the right to use the whole of the land acquired by the Company and the exclusive right to reside in and use the improvements on the proposed lots as follows:
Table 1: Each shareholder will have the right to use the whole of the land acquired by the Company and the exclusive right to reside in and use the improvements on the proposed lots as follows:
|
'A' Class shares |
2 shares held by Person A and Person B for exclusive right to reside and use the improvements on the Property in relation to the proposed Lot A. |
|
'B' Class shares |
2 shares held by Person C and Person D, for exclusive right to reside and use the improvements on the Property in relation to the proposed Lot Z. |
The Company owns one property (the Property) with a house located on it, which is the only asset owned by the Company.
The intention was for the Company to undertake activities (collectively referred to as the Project) which included:
• The demolition of the existing house located on the Property
• Construction of a dual occupancy duplex on the Property land
• Subdivision of the Property into two lots
• The transfer of the titles for the two lots to the Company shareholders in respect of their right to occupy a particular part of the Property prior to the subdivision (the activities are collectively referred to as the Project as discussed below) as follows:
Title of Lot A will be transferred to Person and Person B: and
Title of Lot Z will be transferred to Person C and Person D.
The Project
The local council (the Council) granted development consent for the demolition of the pre-existing structures located on the Property and the construction of a new two-storey attached dual occupancy duplex (collectively referred to as the Duplex).
The existing house located on the Property was demolished with no proceeds being received for the demolition of the pre-existing dwelling and associated structures.
The construction of the Duplex was completed during the following year, with the Property's street address being changed to reflect the dual occupancy, with:
• Person A and Person B renting out Lot A; and
• Person C and Person D living at Lot Z until the present time.
The Plan of the proposed subdivision of the Property was lodged with the Council, with the approval of the subdivision being granted.
An application for a subdivision certificate was lodged with the Council which was approved by the Council after several months.
The Company registered the subdivision of the Property into two separate Torrens titles for the attached dual occupancy dwellings.
The separate titles for Lots A and Z were issued to the Company.
The titles of Lots A and Z will be transferred from the Company to the shareholders for no consideration, with nothing being paid for or received in relation to the transfer.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 112-25
Income Tax Assessment Act 1936 Section 109C