Private ruling: Expiry of right to common property after subdivision of land
Published: February 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers: | 1. Is the Licence a CGT asset? | Yes. | 2. Does market value substitution rule at section 112-20 apply to substitute the first element of the cost base of Licence to be the market value of the Licence? | No. | 3. Does CGT C2 event occur on the Licence ending when the plan of subdivision is registered as per clause 7(b) of the Licence? | Yes. | 4. Is the ending of the Licence as a result of the registration of the plan of subdivision an expiry as per section 104-25(1)(c)? | Yes | 5. Does the Commissioner accept that the Licence has no market value at the time of the relevant CGT event? | Yes

Relevant facts and circumstances: You acquired the land from its Mortgagee. Your acquisition also included a plan to subdivide some adjoining common property that was subject to a 99 year right to occupy, which was held by the Licensor. In order to the preserve the Mortgagee's right of sale, the relevant parties agreed to not register the proposed subdivision of land until after your purchase was settled. Once settlement occurred, the common property was subdivided. Your share of the common property was added to your land, which resulted in the 99 year right to occupy the common property coming to an end.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 112-20 | Income Tax Assessment Act 1997 Section 116-30

Reasons for decision: Summary: Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states a CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. In your case, the Licence was a CGT asset because it was a legal or equitable right. Paragraph 112-20(1)(a)(i) of the ITAA 1997 provides the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from CGT event D1 happening. Section 104-35 of the ITAA 1997 states CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. Example: You enter into a contract with the purchaser of your business not to operate a similar business in the same town. The contract states that $20,000 was paid for this. You have created a contractual right in favour of the purchaser. If you breach the contract, the purchaser can enforce that right. In your case, CGT event D1 did not occur given you did not create a contractual right or other legal or equitable right in another entity. Instead, you simply purchased a right that gave you rights to use the common property but you did not create any rights in the Licensor. In other words, unlike a right such as a lease or restrictive covenant, the Licensor had no on-going right to receive periodic income or services from you. It follows the market value substitution rule at section 112-20 does not apply. Instead, your acquisition of the Licence was simply the acquisition of an asset that was acquired together with Lot 2. Section 104-25 of the ITAA 1997 states CGT event C2 happens if your ownership of an intangible CGT asset ends. In your case, when the subdivision occurred, your right under the Licence ended, which was the happening of CGT event C2. Subsection 116-30(1) of the ITAA 1997 provides if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. However, subsection 116-30(3) of the ITAA 1997 provides subsection (1) does not apply to CGT event C2 when the expiry of a CGT asset you own happens. In your case, the CGT asset (the License) you owned expired when your CGT event C2 happened. Therefore, the market substitution under subsection 116-30(1) of the ITAA 1997 does not apply.