Private ruling: Capital gains tax
Date of advice: 29 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does capital gains tax (CGT) apply to the compulsory acquisition of land owned by a self-managed super fund? | A1: Yes | Q2: Is the superannuation fund taxed at a rate of 15% on the assessable CGT? | A2: Yes

Relevant facts and circumstances: The self-managed superannuation fund owns a rural property. The government is to compulsorily acquire X acres of this land for road duplication. The super fund will receive proceeds for the disposal of the land.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 112-30 | Income Tax Assessment Act 1997 Section 115-100 | Income Tax Assessment Act 1997 Section 295-550 | Income Tax Rates Act 1986 Section 26

Reasons for decision: Summary: The CGT provisions are found in Parts 3-1 and 3-3 of the ITAA 1997. CGT event A1 happens when a taxpayer disposes of a CGT asset. A taxpayer disposes of a CGT asset when a change of ownership occurs from them to another entity, whether by some act or event or by operation of law (subsection 104-10(2) of the ITAA 1997). However, a change of ownership does not occur: • if the taxpayer stops being the legal owner of the asset but continues to be its beneficial owner; or • merely because of a change in the trustee. In your case, the property was compulsorily acquired under a State law. There has been a change of ownership from you to the State by operation of law. The State is an entity for the purposes of the ITAA 1997 (see subsection 960-100(1) of the ITAA 1997). Consequently, the compulsory acquisition of the property is a disposal of a CGT asset at the time CGT event A1 happened to the property. As the property was compulsorily acquired by an entity under a power conferred by a State law, the time of the disposal is determined by subsection 104-10(6) of the ITAA 1997. The time of disposal will be the earlier of: • when the taxpayer received compensation from the entity; or • when the entity becomes the asset's owner; or • when the entity entered it under that power; or • when the entity took possession under that power. Section 115-100 of the ITAA 1997 deems that where a complying superannuation fund makes a capital gain from a CGT event that occurs after 21 September 1999 to an asset acquired after that date, the fund will be assessable on two-thirds of the gain, provided the asset has been held for more than twelve months. Tax Determination TD 2001/9 details how to adjust the cost base of a CGT asset where compensation is received for the compulsory acquisition of part of that asset. In determining the cost base of the part of the CGT asset compulsorily acquired, the compensation - to the extent to which it reflects the reduction in value of the remaining part of the CGT asset - forms part of the capital proceeds for the CGT event happening to the part of the CGT asset compulsorily acquired for the purposes of subsection 112-30(3) of the ITAA 1997. Part of a CGT asset can itself be a CGT asset: see paragraph 108-5(2)(a). The compulsory acquisition of the CGT asset representing the part of the asset acquired constitutes a disposal of the CGT asset in terms of CGT event A1 to which Subdivision 124-B applies. (The example in section 124-85 illustrates how to calculate a capital gain or capital loss in accordance with section 112-30 in these circumstances.) Subsections 112-30(2), (3) and (4) provide for apportionment of the cost base of a CGT asset if a CGT event happens to part of the asset and not to the remainder of it. If part of a CGT asset is compulsorily acquired, CGT event A1 happens to the CGT asset representing that part. The cost base of the asset owned before the compulsory acquisition is apportioned in accordance with subsection 112-30(3), having regard to the compensation received and the market value of the remaining part of the asset. To apply subsection 112-30(3) you need to determine the capital proceeds for the CGT event happening on the compulsory acquisition. The capital proceeds - for CGT event A1 happening to the CGT asset representing the part of the asset compulsorily acquired - include the amount of the compensation for the compulsorily acquired part to the extent that it reflects the reduction in value of the part of the CGT asset retained. If the market value of the remaining part of the CGT asset has been reduced by the compulsory acquisition, any consequential effect on the cost base of the part of the asset compulsorily acquired is reflected in the apportionment formula in subsection 112-30(3). Once the cost base of the compulsorily acquired part of the CGT asset is worked out under subsection 112-30(3), the balance of the cost base of the CGT asset is attributed by subsection 112-30(4) to the remaining part of the asset. Section 26 of the Income Tax Rates Act 1986 (ITRA) outlines the tax rates payable by the trustees of superannuation funds as follows: • In respect of the low tax component - 15%; and • In respect of the non-arm's length component - 45%. Section 295-550 of the ITAA 1997 outlines the meaning of non-arm's length income. As a capital gain made because of the disposal of an asset to a non-related entity is not considered non-arm's length income, the assessable capital gain will be taxed at 15%.