Private ruling: Capital gains tax
Published: March 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the sale of one half of the block change the pre-CGT status of the property? | A1: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your spouse purchased a block of land prior to 20 September 1985. After 20 September 1985, the other couple purchased half of your block. You were not able to transfer the title for half of the land because at the time Shire requirements meant land that was classified as "urban" required 4 acres per 'lot'. As your land was less than 4 acres, you could not arrange the transfer. At the time of the sale it was considered safe/prudent/practical for the other couple to have their names registered on the title to protect their interest. The other couple have provided a statutory declaration stating that they purchased a finite identifiable area of land and proceeded to build their family home. Both you and your spouse and the other couple have built your main residences on your prospective halves of the property. You intend to subdivide the original block of land into two lots (lots A and B). You and your spouse will become the sole owners of lot A. The other couple will become the sole owners of lot B.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 108-7.

Reasons for decision: Summary: Section 108-7 of the ITAA 1997 provides that individuals who own a CGT asset as joint tenants are treated as if they each 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. Tenancy in common is a type of co-ownership where two or more persons own interests in the same piece of property. The tenants in common hold undivided shares, possessing the property in common and without exclusive possession of any part of it. In your case, you and your spouse purchased a block of land prior to 20 September 1985. After 20 September 1985, the other couple purchased half of your block. Since the other couple purchased their share, you and your spouse have treated what will become Lot A as your own and the other couple have done likewise with what will become Lot B. You have each built a main residence on different halves of the block. You and your spouse have a distinct one-half share (your CGT asset) in the whole property and the other couple has a one-half share (their CGT asset) in the whole property. However, those two shares are, as noted previously, undivided or not physically identifiable: it is therefore incorrect to treat (the now) Lot A as belonging to you and your spouse, and it is equally incorrect to treat Lot B as belonging to the other couple. This legal outcome remains, notwithstanding that you and your spouse have until now treated Lot A as your own and made improvements upon it whilst the other couple has done the same with regard to Lot B. A case with some similarities but involving a jointly held parcel of shares is Johnson v. FC of T 2007 ATC 2161. Although dealing with shares, it was held in that case that having a one half interest in a parcel of shares did not equate to having exclusive ownership of one half of the total number of shares. The taxpayer submitted that, notwithstanding that the shares were registered in joint names, he and his brother always understood that they each held 50% of the shares; the transfer into individual names merely gave effect to the underlying reality and did not amount to a disposal. The mother also gave evidence that it was her intention that each son would take half the number of shares. The judge in Johnson's case used the following reasoning: Section 108-7 of the ITAA 1997 provided that individuals who held a CGT asset as joint tenants were treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset. In this case, each share was comprised of two assets, one held by each brother. Dividing the parcel in two for the purposes of a transfer to each joint owner effectively required those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they were acquiring. As a result, the rearrangement and reallocation of the jointly-owned shares constituted a disposal of CGT assets under CGT event A1 and tax was levied on the capital proceeds (ie the market value of the interest acquired in the shares) less the cost base. This is consistent with the Commissioner's view in Taxation Determination TD 92/148 . This situation is similar to your case in which the two couples always had an understanding that their half of the block of land belonged to them exclusively. If tenants in common subdivide land and transfer their interests so that they hold ownership interests in different titles, each is liable for CGT. A disposal occurs because the transfer of interests between the tenants in common amount to a change in the legal and beneficial ownership of those interests. This is set out in Taxation Determination TD 92/148. The following example from TD 92/148 can be compared to your own situation: A and B were joint owners of a one hectare block of land acquired in 1986. In 1992, they subdivide the land. A took a one-half hectare block (block 1) and B took the other one-half hectare block (block 2). A acquired a 50% interest in land constituted by block 1 in 1986 and acquired the remaining 50% interest from B in 1992. Similarly, B acquired a 50% interest in the land constituted by block 2 in 1986 and acquired the remaining 50% interest from A in 1992. A and B have each disposed of their 50% interest in that land constituted by blocks 2 and 1 respectively, in 1992. Note: If the original land had been acquired pre-CGT, there would be no disposals subject to CGT. However, in respect of each subdivided block, each individual owner would now hold a 50% pre-CGT interest and a 50% post-CGT interest. Upon the subdivision, you and your spouse will dispose of your 50 per cent share in Lot B to the other couple, thereby triggering CGT event A1 as there will be a change of ownership - in both beneficial and legal terms - of that 50 per cent share in Lot B. In a concurrent and separate transaction, you and your spouse will acquire a 50 per cent share in Lot A, namely the share in Lot A that was previously owned by the other couple. The converse applies in the case of the other couple; it will dispose of a 50 per cent share in Lot A to you and your spouse (again triggering CGT event A1), and will concurrently and separately acquire a 50 per cent share in Lot B from you and your spouse.