Private ruling: Capital gains tax and depreciation
Date of advice: 4 January 2019
Published: April 2019
Ruling period: 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Capital Gains Tax (CGT) event A1 occur on change of ownership from joint tenants to tenants in common with different ownership percentages for Property X? | A1: Yes | Q2: Will you continue to hold the depreciating assets when you change the ownership of Property X? | A2: Yes

Relevant facts and circumstances: You wanted to purchase land to build a property on as tenants in common with a 99%/1% split. This house was to be a rental property. Settlement of the land purchase occurred in 20XX. The land was actually purchased as joint tenants by mistake under the contract. A house was built on the land. Handover occurred on in 20XX. The house was rented from Autumn 20XX. You intend to change the ownership of the property from joint tenants to tenants in common with a 99%/1% split. You are claiming depreciation on various assets in the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-27(2) | Income Tax Assessment Act 1997 section 40-27(4)(a) | Income Tax Assessment Act 1997 section 104-10

Reasons for decision: Summary: CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. Generally, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). Individuals who own a CGT asset as joint tenants are treated as if they owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common (section 108-7 ITAA 1997). | Detailed Reasoning - Application to your circumstances: When you change the ownership of the property so the owners have differing ownership interests, a disposal of part of the interest in the property occurs from one partner to the other partner. This disposal will constitute CGT event A1. When CGT event A1 occurs, a capital gain can result if the capital proceeds are greater than the asset’s cost base and no relevant exceptions apply. | Detailed Reasoning - Question 2: Division 40 of the ITAA 1997 allows a deduction equal to the amount of the decline in value for an income year of a depreciating asset held at any time during the year. This deduction is referred to as a capital allowance deduction, is only available to the extent that the depreciating asset is used for a taxable purpose, and is generally claimed over a number of years, depending on the effective life of the asset. The effective life starts when you begin to use the asset or have it installed ready for use. However, from 1 July 2017, resulting from The Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 , which received Royal Assent on 30 November 2017, there are new rules for deductions for decline in value of certain second-hand depreciating assets where you hold a rental property. If the property is being used to provide residential accommodation, but not in the course of carrying on a business, then depreciation on assets which you did not hold when they were first used, or first installed ready for use cannot be depreciated unless the residential premises were supplied to you as new residential premises. | Detailed Reasoning - Application to your circumstances: You purchased a parcel of land. You built a house on this land. That house contained depreciable assets. The depreciable assets within the house are taken to be held by you from first use as you are the legal owners of those assets and have always been the legal owners of those assets. When you affect the change of ownership, you will still own the assets. Therefore the rules regarding second-hand assets do not apply to you.