Private ruling: Dissolution and recreation of strata title
Date of advice: 24 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the dissolution of the existing strata scheme trigger a CGT event? | A1: No. | Q2: Will the subsequent strata subdivision of the relevant properties trigger a CGT event? | A2: No.

Relevant facts and circumstances: You acquired a block of X strata-titled apartments. Each of the X individual apartments in the apartment block has always been held by you and your spouse as tenants in common in equal shares. The apartment block was acquired for long-term rental income and capital growth. The respective 50% interests you each hold in the apartment block are on capital account. You recently received development approval to add a further X apartments to the current block. Construction works were carried out in accordance with the development approval. The new apartments have not yet been separately strata titled. The new apartments are currently held by you and your spouse as a Torrens title lot as tenants in common in equal shares. The new apartments will be retained for rental income and long term capital growth and are being held on capital account. You are proposing to dissolve the current strata scheme which currently only relates to the original apartments. After the dissolution of the existing strata title you will hold a single Torrens title over the entire apartment block as tenants in common. You will then strata-subdivide the all of the apartments under a new, separate, strata scheme. This will create X strata titles, one for each of the apartments on the block. The new strata titles will be held by you and your spouse as tenants in common.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-10(2) | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 108-5(2) | Income Tax Assessment Act 1997 Section 109-5(1) | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 112-25(3) | Income Tax Assessment Act 1997 Section 112-25(4)

Reasons for decision: Summary: The capital gains provisions, Part 3-1, Division 104 of the Income Tax Assessment Act (ITAA 1997), contain 53 CGT events. In your situation only CGT event A1, 104-10 of the ITAA 1997 may apply. CGT event A1 happens if you dispose of a CGT asset . You dispose of a CGT asset where there is a change of ownership. Section 108-5 of the ITAA 1997 defines a CGT asset as: (a) any kind of property; or (b) any legal or equitable right that is not property. Note 1 after subsection 108-5(2) of the ITAA 1997 gives examples of CGT assets. One of the examples is land and buildings. Therefore, the asset in question is a CGT asset, and it needs to be determined if the dissolution and the recreation of the new strata scheme is the happening of a CGT event A1. Section 112-25 of the ITAA 1997, regarding split, changed or merged assets, states, if a CGT asset is split, or 2 or more CGT assets are merged, and you are the beneficial owner of the original asset(s) and the new asset(s), no CGT event happens. In you case, you owned the original Strata titles as tenants in common. You created two new apartments under a Torrens title. You propose to dissolve the current X Strata titles and hold the entire property under a Torrens title, you will then create Y new strata titles to account for all of the apartments on the block. You and your spouse owned an interest in the property, at all times, as tenants in common in equal shares. Therefore, the ownership of the property has not changed. As there has been no change in beneficial ownership of the land, in accordance with subsection 104-10(2) of the ITAA 1997, CGT event A1 does not happen. At the end of the process, there has been a merging and splitting of CGT assets, you will be left with an interest that is similar to the interest you had before the redevelopment commenced. Therefore, the act of re-organising the strata titles will not trigger any CGT events under section 104-5 of the ITAA 1997, as there will be no disposals, cancellations or similar endings of any CGT asset.

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