Edited version of private advice

Authorisation Number: 1052284390434

Date of advice: 6 August 2024

Ruling

Subject: Capital gains tax

Question 1

Are you entitled to roll over relief under section 124-190 of the Income Tax Assessment Act 1997 (ITAA 1997) for the step of changing ownership of the property prior to the creation of the strata scheme?

Answer

No.

Question 2

Are you entitled to roll over relief under section 124-190 of the ITAA 1997 after the creation of the strata scheme?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The property the subject of the application is a multi-dwelling residential building consisting of several units.

As at the date of this application the title to the Property identifies a number of registered proprietors.

Despite there being a folio identifier for the Property, the Property is held by the parties under dual entitlement rights. Dual entitlement being the practice of the relevant Land Registry Services in which it acts as a stay of registration until single ownership of an entire lot is obtained. This situation has arisen following a consolidation of the former parcels of land.

An individua passed away a few years ago and in accordance with their Will and the Grant of Probate their share will result in the ownership of the Property being updated once registration of the Transmission Application has been registered:

The Transmission Application has not yet been lodged for registration with Land Registry Services.

A portion of the Property was purchased by the previous owners a few decades ago.

Another portion of the Property was purchased prior to 20 September 1985 by the previous owners.

A number of years go the previous owners transferred the property purchased prior to 1985 to their children.

The purpose of the transfer was to allow the children to be parties to the loan to enable the units to be built and to receive their individual units on subdivision. The intention was always for the units to be for all the children.

It was the previous owners intentions that in relation to property purchased after 1985, a number of units would be given to some their children with the remaining units to be owned by the applicants as tenants in common in equal shares.

It was the overall intention of the parties at the time of construction of the units and upon the creation of the strata scheme that the applicants would each become the sole registered proprietors of a unit and another single unit being owned by the applicants as tenants in common in equal shares.

A draft strata plan had been prepared in anticipation of carrying out the intention referred to above.

A valuation was obtained at the time the construction of the units had been completed.

Whilst a draft Strata Plan had been prepared it was however not lodged. It was decided at the time to carry this out at a later stage and not incur the fees at that stage.

One of the previous owners passed away several years ago. The other owner as the surviving joint tenant became the sole registered proprietor of property purchased after 1985. A notice of death was lodged in the following year with Land Registry Services.

It is the applicants' ultimate end intention to have an ownership structure that aligned with the intentions of the previous owners.

The lots have always been rented out to tenants for a number of years.

Each applicant has exclusive possession of their lot.

You will proceed in two steps.

The first step will involve changing the ownership structure so that the whole property is owned by the siblings as tenants in common in equal shares.

The second step will be the strata title subdivision with each Lot being transferred to the sibling that has exclusive possession as outlined above.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 160ZZPG

Income Tax Assessment Act 1997 section 118-42

Income Tax Assessment Act 1997 section 124-190

Reasons for decision

The Income Tax Assessment Act 1997 (ITAA 1997) provides for the availability of two capital gains tax (CGT) concessions in respect of strata title conversions: an exemption is available to the owner of the land in section 118-42 of the ITAA 1997 and optional roll-over relief is available to the persons entitled to occupy the units in section 124-190 of the ITAA 1997.

Section 160ZZPG of the Income Tax Assessment Act 1936 (ITAA 1936), the equivalent former provision of sections 118-42 and 124-190 of the ITAA 1997, contained optional roll-over relief which applied where land on which a building or buildings were erected was subdivided into strata units or strata units and common property and immediately before and after the subdivision a taxpayer had a particular asset in relation to the land. Section 160ZZPG of the ITAA 1936 has now been repealed and ceased to apply from the 1998-99 income year.

The application of section 160ZZPG of the ITAA 1936 to tenancy in common arrangements having collateral agreements granting participants exclusive occupancy, use and enjoyment rights over particular stratum units was considered by the Commissioner in Taxation Ruling TR 97/4 Income tax: roll-over relief for buildings subdivided under strata title law into stratum units and common property. Although the ruling was issued in relation to the ITAA 1936 provisions, the principles in the ruling still apply to the exemption and roll-over relief provisions in the ITAA 1997.

Roll-over relief on a strata title conversion of a building is provided in subdivision 124-D of the ITAA 1997 to a person whose right to occupy a unit or units in a building is replaced by ownership of a stratum unit corresponding to the former unit.

Under subsection 124-190(1) of the ITAA 1997 a taxpayer may choose for the roll-over to apply where they have disposed of their right to occupy a unit and they have received title to a stratum unit corresponding to the unit which they had the right to occupy immediately before the conversion.

Paragraph 21 of TR 97/4 states that a strata title subdivision is achieved by registering a strata plan. On registering a strata plan, a separate title is created for each lot and common property in much the same way as separate titles are created for lots in a subdivision of land.

Paragraph 22 of TR 97/4 states that broadly speaking, the conversion to strata title ownership covered in this Ruling involves the following two steps:

•         The original registered proprietors (tenants in common) subdivide the land and the building erected on the land into stratum units and become the owners of the stratum units and common property (if any).

•         The original registered proprietors transfer the stratum units to the tenants in common so that each tenant in common owns the unit which she occupied, used or enjoyed immediately before the subdivision.

In accordance with paragraphs 43 to 48 of TR 97/4 if tenants in common subdivide a building and transfer their interests so that each tenant in common becomes a registered proprietor of a stratum unit, each tenant in common is prima facie liable for CGT on any disposal which occurs as a result of that subdivision and transfer. A disposal occurs because the transfer of interests between tenants in common amount to a change in legal and beneficial ownership of those interests.

Roll-over relief is available under section 124-190 of the ITAA 1997 for such disposals if before the conversion process the tenant in common owns property that gives a right to occupy a unit in a building.

Prior to conversion tenants in common have, in the absence of an agreement or understanding granting each tenant in common exclusive occupation (including an exclusive right of possession) of a particular stratum unit, occupancy rights in relation to the whole building, rather than occupancy rights in relation to a particular stratum unit.

Application to your circumstances

The roll over is not available to you in relation to the first step of your process. This is not part of the strata title subdivision.

If you transfer the lots into equal shares prior to the creation of the strata scheme the roll over will not apply and CGT will be payable.

Once the creation of the strata scheme has occurred the roll over will apply to each of you as you each have exclusive rights to the corresponding lot.