Private ruling: ection 118-42 of the ITAA 1997
Date of advice: 24 January 2022
Published: April 2022
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1:  | A1: Yes. | Q2:  | A2: Yes.

Relevant facts and circumstances: You and another individual acquired equal interests as tenants in common in a building consisting of two units. You and the other individual agreed to occupy separate units. You moved into one of the units. The building was later subdivided by strata title. You and the other individual then transferred their equal ownership interest to each other, resulting in each individual holding 100% ownership interest in their own unit.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 section 118-142

Reasons for decision: Summary: Section 118-42 of the ITAA 1997 applies to disregard a capital gain or loss if you own land on which there is a building and you subdivide the building into stratum units and transfer each unit to the entity who had the right to occupy it just before the subdivision. In your case, you and another individual agreed that you would occupy one unit and they would occupy the other unit. The building was subsequently subdivided into strata titled units. After the building was strata titled, you transferred your 50% interest in one unit to the other individual and they transferred to you their 50% interest in your unit. Based on these facts, any capital gain or loss as a consequence of transferring your interest to the other individual is disregarded in accordance with section 118-42 of the ITAA 1997. Section 112-20 of the ITAA 1997 determines market value as the first element of your cost base or reduced cost base for a CGT asset at the time of acquisition where: you did not incur expenditure to acquire it; or some or all of the expenditure you incurred to acquire it cannot be valued; or you did not deal at arm's length with the other entity in connection with the acquisition. In your case, you did not deal at arm's length with the other individual when they transferred to you their 50% ownership interest in your unit. Therefore, paragraph 112-20(1)(c) of the ITAA 1997 applies to deem this 50% portion of your cost base or reduced cost as market value at the date of transfer.

Subject: Transfer of interest in strata title unit - s ection 118-42 of the ITAA 1997: Question 1: Will section 118-42 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain you make from transferring your 50% ownership interest in the strata titled unit to the other individual? | Question 2: Will your cost base for the 50% ownership interest in the strata titled unit transferred to you from the other individual be based on the market value of the unit on the date of transfer?