Edited version of private advice

Authorisation Number: 1052267156707

Date of advice: 27 June 2024

Ruling

Subject: CGT - disposal of an asset

Question

Will the cancellation of the existing Strata Title trigger Capital Gains Tax ('CGT') Event A1 under subsection 104-10(2) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

No

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The Scheme commences on:

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background Information

1.      The Trust currently holds x strata titles for x properties held at XXX.

2.      The x strata titled properties were first purchased by the Trust on DD MM YYYY.

3.      The interests in the x strata titled properties are held on capital account.

4.      Since MM YYYY, the x strata titled properties have been owner occupied.

5.      The Trust is intending to cancel the strata title for the properties and then hold the properties on a single Torrens title with the YYYY financial year.

6.      It is intended that the properties will be renovated and then leased out to tenants by the Trust.

Information provided

7.      You have provided a number of documents containing detailed information in relation to the Trust, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Response to further questions provided DD MM YYYY

8.      We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

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

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Subsection 118-130(1)

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The cancellation of the existing strata title and conversion to a Torrens title over the properties will not trigger Capital Gains Tax ('CGT') Event A1 under subsection 104-10(2) of the Income Tax Assessment Act 1997 ('ITAA 1997').

DETAILED REASONING

9.      The CGT provisions in Division 104 of Part 3-1 of the ITAA 1997 contain 53 CGT events.

10.   In the Trust's situation, only CGT event A1 under section 104-10 of the ITAA 1997 may apply.

11.   CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset where there is a change of ownership under section 104-10 of the ITAA 1997.

12.   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.

13.   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 (strata titled properties) in question is a CGT asset, and it needs to be determined if the dissolution/cancellation of the Strata Titles results in CGT event A1 occurring.

14.   Section 112-25 of the ITAA 1997, regarding split, changed or merged assets, states that 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. It describes split, changed or merged assets as:

(1)    This section sets out what happens if:

(a)    a CGT asset (the original asset ) is split into 2 or more assets (the new assets ); or

(b)    a CGT asset (also the original asset) changes in whole or in part into an asset (also the new asset) of a different nature;

and you are the beneficial owner of the original asset and each new asset.

Example: You subdivide a block of land into 3 separate blocks. Each of those blocks is a new asset.

(2)    The splitting or change is not a CGT event.

15.   Section 104-10 of the ITAA 1997 describes the disposal of a CGT asset - CGT Event A1. Specifically, subsection 104-10(2) states that:

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

16.   Subsection 118-130(1) further describes the meaning of ownership interest in land or a dwelling as:

(1) You have an ownership interest in land or a dwelling if:

(a) for land - you have a legal or equitable interest in it or a right to occupy it; or

(b) for a dwelling that is not a flat or home unit--you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

(c) for a flat or home unit--you have:

(i) a legal or equitable interest in a * stratum unit in it; or

(ii) a licence or right to occupy it; or

(iii) a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

APPLICATION TO YOUR CIRCUMSTANCES

17.   In this case, the Trust owns the original properties which are held on strata titles.

18.   The Trust is intending to cancel the current strata titles and hold the properties under a Torrens title.

19.   As such, the beneficial ownership of the properties will not change.

20.   As there has been no change in beneficial ownership of the properties, in accordance with subsection 104-10(2) of the ITAA 1997, CGT event A1 does not happen.

21.   At the end of the process, there will be a merging of CGT assets, and the Trust will be left with an interest that is similar to the interest they had before the renovations commence. Therefore, the act of cancelling the strata titles 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.

CONCLUSION

The cancellation of the existing strata title and conversion to a Torrens title over the two properties will not trigger Capital Gains Tax ('CGT') Event A1 under subsection 104-10(2) of the Income Tax Assessment Act 1997 ('ITAA 1997').