Private ruling: Income tax - Capital gains tax - Crown lease
Date of advice: 8 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the conversion of a Crown lease to freehold constitute a capital gains tax event? | A1: Yes. | Q2: Where the conversion of a Crown lease to freehold constitutes a capital gains tax event is the entity entitled to capital gains tax roll-over relief under section 124-575 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Is the entity subject to capital gains tax when the freehold property including the building affixed to the property is sold? | A3: No. | Q4: Has there been a change in the majority underlying ownership of the company under Subdivision 149-B of the ITAA 1997 when shareholdings are transferred due to death? | A4: No.

Relevant facts and circumstances: Prior to1980 the entity issued X shares to a number of shareholders: All shares issued by the entity hold the same rights, in respect of voting, dividends and corpus distributions. The entity was incorporated prior to 1980 Changes have occurred in share ownership of the entity due to the death of some shareholders. Prior to 1980 a government department leased a building and crown land (the property) to the entity for a period of X years with an option for a further term. The entity used the property to carry on a business. Prior to 20 September 1985 the government department and the entity entered into a sale agreement to purchase the building on the property. Prior to 20 September 1985 the entity made an application to the government department requesting the conversion of the perpetual lease to freehold. Prior to 20 September 1985 the government department confirmed they had no objection to the application for conversion from perpetual lease to freehold. After 20 September 1985 the land was transferred to freehold. The entity sold the property to an unrelated third party.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Subsection 108-55(2). | Income Tax Assessment Act 1997 Subsection 124-10(2). | Income Tax Assessment Act 1997 Subsection 124-10(4). | Income Tax Assessment Act 1997 Section 124-575. | Income Tax Assessment Act 1997 Section 124-580. | Income Tax Assessment Act 1997 Section 104-25. Income Tax Assessment 1997 subsection 149-15(1) Income Tax Assessment 1997 subsection 149-15(2) | Income Tax Assessment 1997 subsection 149-15(3) | Income Tax Assessment 1997 subsection 149-15(4) | Income Tax Assessment 1997 subsection 149-15(5) | Income Tax Assessment 1997 subsection 149-30(1) | Income Tax Assessment 1997 subsection 149-30(2) | Income Tax Assessment 1997 subsection 149-30(3) | Income Tax Assessment 1997 subsection 149-30(4) | Income Tax Assessment 1997 section 149-50

Reasons for decision: Summary: The entity is taken to have acquired the freehold status on the date that the Crown lease was originally acquired before 20 September 1985. The land and the building are pre CGT assets and any capital gain or capital loss arising from its disposal of the land and building is disregarded under Division 104 of the ITAA 1997. Further the Commissioner considers that upon the date of death of original shareholders as noted below, the new owners are treated as having held the underlying interest of the 'former owner' for the period the previous owner held them in the company. Therefore, the majority underlying interests in the assets held by the company have not changed and accordingly, the land and building maintain their pre-CGT status. | Detailed Reasoning - Capital gains tax (CGT) - general: Section 102-20 of the ITAA 1997 provides that you can only make a capital gain or loss when a CGT event happens. The gain or loss is made at the time of the CGT event and can only be made in respect of a CGT asset. The most common CGT event is event A1 which happens when a person disposes of a CGT asset to someone else. You are deemed to have disposed of an asset if a change in ownership occurs from you to another entity (section 104-10 of the ITAA 1997). Generally, the time of the event is when you enter into the contract for the disposal. You make a capital gain if the capital proceeds from the disposal of a CGT asset are greater than the asset's cost base. You make a capital loss if the reduced cost base of the asset is greater than the capital proceeds. Any assessable gain from a CGT event is included in your assessable income by section 102-5 of the ITAA 1997. | Detailed Reasoning - CGT assets and pre-CGT assets: Land and dwellings acquired on or after 20 September 1985 are CGT assets and the disposal of such assets will generally give rise to a capital gain or loss. When acquired before 20 September 1985, such assets are considered pre-CGT assets and generally, any gain or loss made from the disposal can be disregarded. When a Crown lease is converted to a freehold title, a CGT event happens. You surrender a right (the Crown lease) and acquire a new right (the freehold title) as a replacement asset. A replacement asset roll-over is available on the conversion of a Crown lease to a freehold title. The roll-over is automatic and any capital gain or capital loss made from the original asset is disregarded. Where the original Crown lease was acquired before 20 September 1985, the date of acquisition of the replacement asset (freehold) is taken to be the date that the original Crown lease was acquired. In this case, the entity acquired the land under the crown lease prior to 20 September 1985. The crown lease was converted into a freehold title after 20 September 1985. Therefore, in accordance with the replacement asset roll-over, the entity is taken to have acquired the freehold title on the date that the Crown lease was originally acquired before 20 September 1985. Therefore the land is a pre CGT asset and will not be subject to capital gains tax when it was sold. Similarly, the building originally affixed to the land was acquired before 20 September 1985 and as such is a 'pre-CGT asset'. Therefore, any capital gain or capital loss arising from the disposal of the land and building would be disregarded under Division 104 of the ITAA 1997. | Detailed Reasoning - Majority underlying interests in the property: The provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset (unless the entity is a public entity listed in section 149-50 of the ITAA 1997). This happens at the earliest time when the 'majority underlying interests' in the asset were not held by 'ultimate owners' who held majority underlying interests in the asset immediately before 20 September 1985. Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the owner' held them. In this case, the changes in shareholdings only occurred due to death. Therefore, the majority underlying interests in the assets held by the company have not changed and accordingly, the land and building maintain their pre-CGT status.