Edited version of private advice

Authorisation Number: 1052311098649

Date of advice: 2 October 2024

Ruling

Subject: Capital gains tax

Question 1

Did the easement on the property imposed by the state government on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, Pre-CGT.

Question 2

Did the rezone of the property to proposed public open space on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No.

Question 3

Did the revocation and rezone of the property by virtue of state legislation represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No.

Question 4

Was there a CGT A1 event when Taxpayer D acquired a XX% interest in the property from Taxpayer E on DD MM YYYY for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Question 5

Was there a CGT A1 Event when Taxpayer D died and the property passed to their family member Taxpayer G on DD MM YYYY for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Question 6

Did Taxpayer D hold a CGT asset within the meaning of section 108-5 of the ITAA 1997 immediately prior to their death consisting of a right to compensation arising from limitations imposed in respect of the property in the YYYYs as described in questions 1 and 2 ("the Right to Compensation")?

Answer

No.

Question 7

If the answer to question 6 is "yes", was the Right to Compensation a pre-CGT asset within the meaning of section 149-10 of the ITAA 1997 immediately before the death of Taxpayer D?

Answer

Not Applicable.

Question 8

If the answers to questions 6 and 7 are both "yes", did the Right to Compensation take a cost base in the hands of Taxpayer G equal to the market value of the Right to Compensation on the day of Taxpayer D's death pursuant to section 128-15 of the ITAA 1997?

Answer

Not Applicable.

Question 9

Will the costs of establishing, maintaining and Taxpayer G satisfying their obligations as the executor of Taxpayer D's estate under the deed of family arrangement form part of the cost base of the property pursuant to section 110-25 of the ITAA 1997?

Answer

No.

Question 10

Did the designation of the property to Public Acquisition Overlay by the state government on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No.

Question 11

Did the notice of intention to acquire served on the owners of the property by the state government on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No.

Question 12

Did the compulsory acquisition of the property on DD MM YYYY by the state government on DD MM YYYY represent a CGT A1 event for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Question 13

Is that part of the compensation to be received from the state government that relates to the reduction in value of the property due to limitations being placed on the land in the YYYYs as described in questions 1 and 2, assessable under the ITAA 1936 or ITAA 1997?

Answer

Not Applicable.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The historical ownership of the property, activities in relation to the property, and information about the deceased estates as provided by the taxpayer is as follows:

Table 1: The historical ownership of the property, activities in relation to the property, and information about the deceased estates as provided by the taxpayer is as follows:

Public acquisition overlays

On DD MM YYYY, the Governor in Council approved a planning scheme in respect of the area covered by the Property.

This resulted in the rezoning of the Property to Proposed Public Open Space. State legislation required municipal council to prepare a planning scheme for its municipal district, and for any adjoining area for which it was a municipal authority, as soon as practicable after the commencement of the state legislation.

The effect of the state legislation was that:

•         Any planning scheme in force in the area before the new scheme commenced was revoked

•         All acts, matters or things of a continuing nature made, done or commenced under or in relation to the revoked scheme were taken, for the period after the new scheme had commenced, to have been made, done or commenced in relation to the new planning scheme, to the extent that they could have been made, done or commenced under or in relation to the new planning scheme; and

•         From commencement of the new planning scheme all rights and liabilities existing under or in relation to the revoked scheme continued under or in relation to the new planning scheme to the extent that the new planning scheme had provisions to the life effect as provisions of the revoked scheme.

Amendments were made to the state legislation in XXXX to include powers under section X to prepare and approve standard planning provisions to be called the state planning provisions which included a concept of public acquisition overlay, with any land included in the public acquisition overlay to be reserved for public purposes within the meaning of the state legislation with the acquiring authority being the Minister, public authority, or municipal council specified in the schedule to the overlay as the acquiring authority for the land.

On DD MM YYYY, a Certificate was issued by the state government which included the following information:

•         The certificate was issued for the property

•         The land is covered by the Planning Scheme

•         The land is:

­   Within Public Acquisition Overlay X; and

­   Abuts Public Acquisition Overlays X and X; and Road Zone Category X.

The approval of the Planning Scheme was published in the state government Gazette on DD MM YYYY. The introduction of this planning scheme resulted in the Proposed Public Open Space being changed to the new format/concept of a Public Acquisition Overlay (PAO) as follows: Public Acquisition Overlay X applied to the whole Property.

On DD MM YYYY, the Minister published an order in the state government Gazette designating the whole Property as being in the project area of the Project.

Deed of Family Arrangement

After Taxpayer D passed away in DD MM YYYY, their relatives commenced proceedings against Taxpayer G as the Executor of Taxpayer D's Estate seeking provision from the Estate.

After DD MM YYYY a Deed of Family Arrangement (the Deed) was entered into which included the following:

Compulsory acquisition of the Property

On DD MM YYYY, a Notice of Acquisition for the compulsory acquisition of interests in the Property was published in the state government Gazette.

On DD MM YYYY, the state government issued a Notice of Acquisition, Compulsory Acquisition of interest in land which included the following information:

•         The state government, being the project authority appointed in accordance with the state legislation for an approved project, declares that by this notice it acquires the whole of the land:

­   The interest in fee simple of the registered proprietors, Taxpayer K, Taxpayer L, Taxpayer G, Taxpayer M and Taxpayer N;

­   The leasehold interest of Company A; and

­   All other interests in the land.

•         The acquisition is made pursuant to state legislation.

•         A notice of intention to acquire the interests in the land was served on:

­   The registered proprietors on DD MM YYYY

­   The occupants, being Company A, Company B, Taxpayer O, Taxpayer P, Taxpayer Q and Taxpayer R on DD MM YYYY; and

­   The occupant Taxpayer S on DD MM YYYY.

On DD MM YYYY, the state government issued a Certificate of Valuation for the property and interest being assessed and ultimate value being $XX.

On DD MM YYYY, the state government issued a Certificate of Valuation for the leasehold interest in the Company A which included details about the address, proprietors (including Taxpayer G), interest being assessed and ultimate value being $XX.

On DD MM YYYY, an email was sent from the state government to the registered proprietors and leasehold interest holder of the Property, in relation to an initial offer of compensation for the property which included the following information:

•         The Authority had assessed and determined the compensation payable to each of the owners of the land (collectively referred to as the owners) and the operator of the business known as the Company A and that the assessment of each party's interest was independent. By treating the parties as a collective, the Authority was able to assess compensation on the basis that the land was encumbered by a lease and that the owners had control over the terms of the lease if not for the recent acquisition.

•         The Authority decided to treat the parties as a collective and make a joint offer which is only capable of acceptance as a whole and by all parties simultaneously

•         The Authority had received independent advice from the state government valuer in relation to the compensation payable and were prepared to offer $XX, exclusive of Goods and Services Tax, as compensation for the parties combined interests in the Land.

•         The sum offered was greater than the amount specified in the Valuation, with the difference between the sum offered and the Valuation amount being due to the inclusion in the offer for allowances for disturbance losses, solatium, professional expenses and the security deposit. The disturbance loss offered assumes the business is not able to be relocated.

•         The offer of compensation has been based on business closure with the Authority having formed the view that the Collective will be unlikely to secure a suitable replacement property within a reasonable radius of the existing business in time to relocate prior to the Authority taking possession of the Property by DD MM YYYY.

A response to the offer of compensation form was provided for the Collective to fill out in accordance with whether they accepted the offer in full, or in part with further compensation, or rejected the offer in full.

Taxpayer G has not received a compensation amount from the Authority as negotiations as to the amount are still ongoing with respect to the quantum to be.

Relevant legislative provisions

Income Tax Assessment Act 1997section 104-35

Income Tax Assessment Act 1997section 102-23

Income Tax Assessment Act 1997section 112-25

Income Tax Assessment Act 1997section 108-5

Income Tax Assessment Act 1997section 112-25

Income Tax Assessment Act 1997section 118-130

Income Tax Assessment Act 1997section 128-15

Income Tax Assessment Act 1997section 149-10

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for Decision

Question 1

Did the easement on the property imposed by the state government on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, Pre-CGT

Detailed Reasoning

Section 104-35 of the ITAA 1997 provides:

(1) CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.

You have created a contractual right in favour of the purchaser. If you breach the contract, the purchaser can enforce that right.

(2) The time of the event is when you enter into the contract or create the other right.

(3) You make a capital gain if the * capital proceeds from creating the right are more than the * incidental costs you incurred that relate to the event. You make a capital loss if those capital proceeds are less.

(4) The costs can include giving property: see section 103 - 5. However, they do not include an amount you have received as * recoupment of them and that is not included in your assessable income, or an amount to the extent that you have deducted or can deduct it.

The imposition of the easement commenced on DD MM YYY and was created in favour of the State Entity. CGT Event D1 happens when a taxpayer or entity creates a contractual right in another entity or taxpayer. Taxation Determination 1999/77 (TD 1999/77) provided that the Commonwealth and each of the States and Territories is a body politic for the purposes of section 104-35 of the ITAA 1997, TD 1999/77 provides at paragraph 3:

"The Commonwealth and each of the States and Territories is a body politic. They are entities which can create contractual or other rights in you for the purposes of Event Number D1... If they do, you acquire the rights when the Commonwealth, State or Territory enters into the contract or creates the rights"

Taxation Determination 2018/15 (TD 2018/15) provides that the granting of an easement in relation to property will give rise to CGT event D1. Paragraph 1 of TD 2018/15 provides:

"Yes. CGT event D1 (about the creation of rights) rather than CGT event A1 (about the disposal of an asset) happens if a taxpayer grants an easement, profit à prendre or licence over an asset. Consequently:

•         no part of the cost base of the asset can be taken into account in working out the amount of any capital gain or capital loss that arises from the grant

•         any capital gain or capital loss from the grant cannot be disregarded merely because the asset was acquired prior to 20 September 1985

•         any capital gain from the grant is not a discount capital gain, and

•         no exemption is available under Division 118 if the grant relates to a main residence because CGT event D1 is not one of the events listed in subsection 118-110(2) that is relevant to that exemption"

The owners of the property acquired the rights to compensation on the imposition of the easement when the right was created being DD MM YYYY. As no consideration was paid at this time there will be no capital gain or loss. Section 102-23 of the ITAA 1997 provides that despite the lack of a capital gain or loss, a CGT event may still occur.

The rights to compensation from the imposition of the easement cease on DD MM YYYY when the land is rezoned (including the easement).

Section 104-25 of the ITAA 1997 provides:

(1) CGT event C2 happens if your ownership of an intangible * CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option--being exercised; or

(f) if the asset is a * convertible interest--being converted.

The cessation of the rights to compensation from the imposition of the easement represent the expiration of the CGT asset created by CGT event D1 and therefore CGT event C2 will occur. At the time of the rezone no capital proceeds were received by the owners of the property and as such there will be no capital gain in relation to this event.

Section 149-10 of the ITAA 1997 provides:

A * CGT asset that an entity owns is a pre - CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998 - 99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre - CGT asset of the entity because of this Division.

The CGT asset was created on DD MM YYYY and later ceased on DD MM YYYY, there was no capital proceeds received in relation to this asset and no financial cost to the property owners. Because the asset came into existence before 20 September 1985 it was a pre-CGT asset for the purposes of section 149-10 of the ITAA 1997.

Question 2

Did the rezone of the property to proposed public open space on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No

Detailed Reasoning

The act of rezoning land is not a CGT event for the purposes of Part 3-1 of the ITAA 1997. However, in certain circumstances the rezoning of land could be considered to be an intangible capital improvement for the purposes of subdivision 108-D of the ITAA 1997.

Taxation Determination 2017/1 (TD 2017/1) provides that intangible capital improvements made to a pre-CGT asset can be a separate CGT asset. In illustrating this TD 2017/1 provides an example at paragraph 2:

"A farmer, holding pre-CGT land, obtains council approval to rezone and subdivide the land. Those improvements may be separate CGT assets from the land."

In determining if a rezone can constitute a separate capital asset section 108-70 of the ITAA 1997 provides:

(1) A capital improvement to land is taken to be a separate * CGT asset from the land if one of the balancing adjustment provisions set out in subsection 108 - 55(1) applies to the improvement (whether or not there is a balancing adjustment).

(2) A capital improvement to a * CGT asset (the original asset ) that you * acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate * CGT asset if its * cost base (assuming it were a separate CGT asset) when a CGT event happens (except one that happens because of your death) in relation to the original asset is:

(a) more than the * improvement threshold for the income year in which the event happened; and

(b) more than 5% of the * capital proceeds from the event.

The improvement, being the rezone is being made to a pre-CGT asset which is the property. For the remainder of the conditions in section 108-70 to be met, the cost base of the improvement must be more than the improvement threshold for the income year in which the CGT event happened to the original asset. The rezoning did not result in any change to the underlying asset or cost to the owners of the property, nor did the owners of the property receive any capital proceeds as a result of the rezone.

The conditions in section 108-70 of the ITAA 1997 can not be met in relation to the rezoning being a separate capital asset. The rezoning itself is also not a CGT event for the purposes of Part 3-1 of the ITAA 1997.

While the rezoning of the property may give rise to an entitlement to compensation similar to the reasoning as described in question 1 this rezoning was revoked in YYYY by operation of state legislation.

The revocation of the existing rezone and planning scheme in relation to the property in YYYY would otherwise represent the cessation of a CGT asset if one existed at the time. The operation of thestate legislation caused the revocation of the former rezone and imposed a new one by operation of law.

Any CGT event in connection with the rezone of the property at this time would be a post-CGT event as this is after 20 September 1985 for the purposes of the ITAA 1997.

Question 3

Did the revocation and rezone of the property by virtue of state legislation represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No

Detailed Reasoning

The act of rezoning land is not a CGT event for the purposes of Part 3-1 of the ITAA 1997. Consistent with the reasoning for question 2 the rezone that occurred in YYYY by operation of the state legislation will not give rise to a CGT event.

The act of rezoning could be a subdivision for the purposes of the ITAA 1997. For the avoidance of doubt, if the rezone amounted to a subdivision Capital Gains Taxation Determination 7 (TD 7) provides guidance on subdivisions of pre-CGT land. Paragraph 1 of TD 7 provides:

"Where pre-CGT land is sub-divided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA97."

Where an asset is split, changed or merged with another then a new CGT asset may be created. Section 112-25 of the ITAA 1997 provides:

(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.

In the present case, the rezone of the property in YYYY does not represent a splitting of the asset as the property retains the identical character and attributes that it had before the rezone and the land itself does not change in whole or in part because of the rezone. Furthermore subsection 112-25(2) of the ITAA 1997 provides that "the splitting or change is not a *CGT event." As such any split or change would not amount to a CGT event, however, the Commissioner does not consider that the rezone is a split, change or separate CGT event for the purposes of Part 3-1 of the ITAA 1997.

Question 4

Was there a CGT A1 event when Taxpayer D acquired a XX% interest in the property from Taxpayer E on DD MM YYYY for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Detailed Reasoning

Section 104-10 of the ITAA 1997 provides:

(1) CGT event A1 happens if you * dispose of a • CGT asset.

(2) 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.

Taxpayer D and Taxpayer E inherited each a XX% interest in the property from Taxpayer A. On DD MM YYYY Taxpayer D acquired Taxpayer E's XX% interest in the property. The acquisition by Taxpayer D represents a CGT event A1 because a change of ownership has occurred from Taxpayer E to Taxpayer D.

While Taxpayer D and Taxpayer A had inherited an asset that was pre-CGT, the entire asset ceases from being a pre-CGT asset as at DD MM YYYY because immediately following Taxpayer D's acquisition of Taxpayer E's share the majority underlying interests in the asset had changed from the majority underlying interests in the asset immediately before 20 September 1985. This is set out by section 149-30 of the ITAA 1997.

Section 149-30 of the ITAA 1997 provides:

(1) The asset stops being a * pre - CGT asset at the earliest time when * majority underlying interests in the asset were not had by * ultimate owners who had * majority underlying interests in the asset immediately before 20 September 1985.

(1A) Also, Part 3 - 1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time.

(2) If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time * majority underlying interests in the asset were had by * ultimate owners who had * majority underlying interests in the asset immediately before that day, subsections (1) and (1A) apply as if that were in fact the case.

Immediately before 20 September 1985 Lot 1 was held in accordance with the following table:

Table 2: Immediately before 20 September 1985 Lot 1 was held in accordance with the following table:

Section 149-15 of the ITAA 1997 provides:

(1) Majority underlying interests in a * CGT asset consist of:

(a) more than 50% of the beneficial interests that * ultimate owners have (whether directly or * indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any * ordinary income that may be * derived from the asset.

The asset immediately prior to 20 September 1985 was a pre-CGT asset. When there is a change of more than 50% of the interests in the asset following this date there will be a change in the majority underlying interest and section 149-30 of the ITAA 1997 will operate to stop the entire asset as having a pre-CGT status. Taxation Determination 2000/8 (TD 2000/8) provides further guidance on the interpretation of subsection 149-30(1) of the ITAA 1997, at paragraph 7:

"Under subsection 149-30(1), a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. The asset does not stop being a pre-CGT asset if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests have not changed: subsection 149-30(2). Because an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset are not maintained, a non-public entity needs to examine the underlying interests in its pre-CGT assets on an on-going basis to ensure that majority underlying interests in them have been maintained. A non-public entity would normally examine majority underlying interests if there is any change, direct or indirect, in its shareholdings, unitholdings or other membership interests (e.g., a change of membership interests in one or more of the public entities which own shares in the non-public entity)."

On DD MM YYYY Taxpayer B passed away and leaves their XX% share to their family member Taxpayer F who held the beneficial ownership interest. 50% of the ownership interest had changed as at this date and the new ownership interest in the property was held in accordance with the following table:

Table 3: On DD MM YYYY taxpayer B passed away and their XX% share to their family member Taxpayer F who held the beneficial ownership interest. 50% of the ownership interest had changed as at this date and the new ownership interest in the property was held in accordance with the following table:

As the change was limited to XX%,section 149-30 of the ITAA 1997 did not have application at this date. However, when Taxpayer D acquired the XX% interest from XXXX as at DD MM YYYY, this represented >50% change in the interests held immediately prior to 20 September 1985. The new ownership interest in the property as at DD MM YYYY were in accordance with the following table:

Table 4: The new ownership interest in the property as at DD MM YYYY were in accordance with the following table:

In accordance with subsection 149-30(1) of the ITAA 1997 the property has experienced a >50% change in ownership interests from the previous majority underlying interests that existed immediately before 20 September 1985. As the change in ownership interests is more than 50% the asset will cease to be pre-CGT at the time Taxpayer D acquires the interest of Taxpayer E in the property being DD MM YYYY.

Furthermore, the Commissioner is not satisfied that at all times on and after 20 September 1985 the majority underlying interests in the asset were held by ultimate owners who had majority underlying interests in the asset immediately before that day. As such subsection 149-30(2) of the ITAA 1997 will not have application to retain the properties pre-CGT status.

Question 5

Was there a CGT A1 Event when Taxpayer D died and the property was inherited by their family member Taxpayer G on DD MM YYYY for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Detailed Reasoning

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property. The Property in the present application is a CGT asset for the purposes of section 108-5 of the ITAA 1997. It is accepted that part therein of the property is also a CGT asset for the purposes of section 108-5 of the ITAA 1997.

Taxpayer D passed on DD MM YYYY, prior to this date Taxpayer D had acquired XX% of the property from the estate of their family member being Taxpayer A and XX% from the purchase of Taxpayer E's interest. In the will of Taxpayer A, their family member, Taxpayer C was granted a life interest in the property with the remainder interest in the property held between Taxpayer D and their sibling Taxpayer E.

Taxpayer A had originally acquired the property on DD MM YYYY and the asset was pre-CGT at this time.

Section 128-15 of the ITAA 1997 provides:

(1) This section sets out what happens if a * CGT asset you owned just before dying:

(a) devolves to your * legal personal representative; or

(b) * passes to a beneficiary in your estate.

(2) The * legal personal representative, or beneficiary, is taken to have * acquired the asset on the day you died.

Taxpayer A passed away on DD MM YYYY and at this time a life interest was granted to their family member Taxpayer C and the interest in the property is beneficially held by Taxpayer D and Taxpayer E. Section 128-15 of the ITAA 1997 applies where property is acquired by a beneficiary. The property was a CGT asset and it passed to Taxpayer D and Taxpayer E, as beneficiaries in the estate of Taxpayer A on this date. For the purposes of subsection 128-15(2) of the ITAA 1997 Taxpayer D is taken to have acquired XX% of the property at the date of death of Taxpayer A. Up until the date of Taxpayer D's acquisition from Taxpayer E (DD MM YYYY) the asset is pre-CGT for the purposes of section 149-10 of the ITAA 1997.

Section 104-10 of the ITAA 1997 provides that a CGT event happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that a disposal occurs if a change of ownership occurs from you to another entity. Taxpayer G inherited Taxpayer D's interest in the property on DD MM YYYY representing a change in ownership of the asset. This is a CGT event A1 for the purposes of the ITAA 1997.

Question 6

Did Taxpayer D hold a CGT asset within the meaning of section 108-5 of the ITAA 1997 immediately prior to their death consisting of a right to compensation arising from limitations imposed in respect of the property in the YYYYs as described in questions 1 and 2 ("the Right to Compensation")?

Answer

No.

Detailed Reasoning

Section 108-5 of the ITAA 1997 provides:

(1) A CGT asset is:

(a) any kind of property; or

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

Taxpayer D passed away on DD MM YYYY. Immediately prior to their death they held an ownership interest in the property. During YYYY there was no component of a CGT asset that was connected with the limitations asserted to have been imposed in respect of the property on DD MM YYYY or DD MM YYYY.

The revocation of the existing rezone and planning scheme in relation to the property in YYYY would otherwise represent the cessation of a CGT asset if one existed at the time. The operation of the state legislation caused the revocation of the former rezone and imposed a new one by operation of law.

Any CGT event in connection to the rezone of the property at this time would be a post-CGT event as this is after 20 September 1985 for the purposes of the ITAA 1997.

Question 7

If the answer to question 6 is "yes", was the Right to Compensation a pre-CGT asset within the meaning of section 149-10 of the ITAA 1997 immediately before the death of Taxpayer D?

Answer

Not Applicable.

Question 8

If the answers to questions 6 and 7 are both "yes", did the Right to Compensation take a cost base in the hands of Taxpayer G equal to the market value of the Right to Compensation on the day of Taxpayer D's death pursuant to section 128-15 of the ITAA 1997?

Answer

Not Applicable.

Question 9

Will the costs of establishing, maintaining and Taxpayer G satisfying their obligations as the executor of Taxpayer D's estate under the deed of family arrangement form part of the cost base of the property pursuant to section 110-25 of the ITAA 1997?

Answer

No.

Detailed Reasoning

The Deed of Family Arrangement (the Deed) was entered into after DD MM YYYY in connection with proceedings commenced under legislation for provision from Taxpayer D's estate. The Deed provided a mechanism whereby Taxpayer G could cease to be the sole proprietor of the Property and also recognised the rights XXX had to make any claims for compensation in relation to the property.

The Deed is not an instrument that solely relates to the administration of the property and instead operates as a broader trust instrument that sets out the rights and responsibilities of stakeholders in relation to the administration of the estate of Taxpayer D of which the property is a part. While the Deed does impose limitations on how Taxpayer G may cease to be the sole proprietor, it is not a document that is principally concerned with capital expenditure incurred in relation to the disposal of the property.

Subsection 110-20(6) of the ITAA 1997 provides:

(6) The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. (The expenditure can include giving property: see section 103 - 5.)

The Commissioner does not consider that the Deed is incurred to establish, preserve or defend the taxpayers title to the property and instead that the Deed is the creation of a new trust for the relevant beneficiaries of the estate of Taxpayer D. As such any costs in connection to the Deed would not form part of the cost base of the property.

Question 10

Did the designation of the property to Public Acquisition Overlay by the state government on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No.

Detailed Reasoning

The act of designating land to a Public Acquisition Overlay is not a CGT event for the purposes of Part 3-1 of the ITAA 1997. For the same reasons as described in Question 2 the Commissioner does not consider the designation of the property to a Public Acquisition Overlay as an intangible capital improvement for the purposes of subdivision 108-D of the ITAA 1997.

In determining if a designation of land to Public Acquisition Overlay can constitute a separate capital asset section 108-70 of the ITAA 1997 provides:

(1) A capital improvement to land is taken to be a separate * CGT asset from the land if one of the balancing adjustment provisions set out in subsection 108 - 55(1) applies to the improvement (whether or not there is a balancing adjustment).

Subsection 108-55(1) of the ITAA 1997 provides:

(1) A building or structure on land that you * acquired on or after 20 September 1985 is taken to be a separate * CGT asset from the land if one of these balancing adjustment provisions applies to the building or structure (whether or not there is a balancing adjustment):

(a) Subdivision 40 - D; or

(b) section 355 - 315 or 355 - 525 (about R&D).

The improvement being the designation is being made to a post-CGT asset being Lot 1.

Subdivision 40-D will not have application to the property as there is no requirement to make an adjustment to the taxable income of Taxpayer G when they stop holding the property. Similarly, the research and development provisions will not have application to the property. As such subsection 108-70(1) of the ITAA 1997 will not have application to the property and the act of designating the land to a Public Acquisition Overlay cannot be considered to be either a CGT event or the creation of a separate CGT asset.

Question 11

Did the notice of intention to acquire served on the owners of the property by the state government on DD MM YYYY represent a CGT event for the purposes of Part 3-1 of the ITAA 1997?

Answer

No.

Detailed Reasoning

The service of a notice of intention to acquire on the owners of the property is merely an indication that the state government is considering the compulsory acquisition the property. The act of compulsorily acquiring a CGT asset may give rise to a CGT event but the notice to do so does not change the ownership of the CGT asset for the purposes of Part 3-1 of the ITAA 1997 and is therefore not representative of a CGT event.

Question 12

Did the compulsory acquisition of the property on DD MM YYYY by the state government on DD MM YYYY represent a CGT A1 event for the purposes of section 104-10 of the ITAA 1997?

Answer

Yes.

Detailed Reasoning

Section 104-10 of the ITAA 1997 provides:

(1) CGT event A1 happens if you * dispose of a * CGT asset.

(2) 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.

Taxation Ruling 95/35 Income Tax: Capital Gains: treatment of compensation receipts 95/35 (TR 95/35) provides further detail on the taxation consequences of compensation including compensation paid as a result of compulsory acquisition. Paragraph 4 of TR 95/35 provides:

"If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation."

Taxpayer G has an underlying asset being their interest in the property for the purposes of this ruling. The property was compulsorily acquired by the state government on DD MM YYYY and at this time a change in ownership occurred triggering a CGT A1 event.

While the amount to be received is still in dispute, once the amount is finalised the Commissioner considers the compensation to be for the disposal of the property and not consideration received for the disposal of any other asset, such as the right to seek compensation.

Paragraph 16 of TR 95/35 provides:

"If the amount of compensation is received by the taxpayer partly for permanent damage suffered to, or a permanent reduction in the value of, an underlying asset of the taxpayer, that part of the receipt which represents a recoupment of part of the total acquisition costs incurred in respect of the underlying asset reduces the total acquisition costs."

The state government provided a dissection of the compensation amount to Taxpayer G on DD MM YYYY and indicated the components of the compensation to be paid. Of the listed components all items relate to the value of the property and include amounts for the expenses and valuation fee's incurred in providing the total valuation. The total amount is for the entire property and it will be appropriate for Taxpayer G to apportion the compensation received only to the part that represents a recoupment of part of the total acquisition costs incurred in respect of the property.

Taxpayer G will record a capital gain to the extent that this amount exceeds the cost base as indicated by section 149-35 of the ITAA 1997 as the property ceased its pre-CGT status on 9 May 2002 when more than 50% of the majority underlying interests changed from that of the majority underlying interests immediately prior to 20 September 1985.

Question 13

Is that part of the compensation to be received from the state government that relates to the reduction in value of the property due to limitations being placed on the land in the YYYYs as described in questions 1 and 2, assessable under the ITAA 1936 or ITAA 1997?

Answer

Not Applicable.