Private ruling: Capital Gains Tax (CGT) - apportionment of capital proceeds under subsection 116-40 (1) of ITAA 1997
Published: October 2013
Ruling period: 01/07/2012 to 30/06/2013
Date scheme commenced: 2 August 2012

Ruling: Q1: Will the proposed apportionment of the capital proceeds from the disposal of interests in the assets between the notional pre-CGT asset and the deemed post-CGT separate asset be considered reasonable and therefore in conformity with subsection 116-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: 1) The Taxpayer by contract acquired a 50% interest in an asset, which consisted of the land and a building which had been constructed in 1966. 2) Rental income was derived from retail leases. 3) After 19 September 1985, an extension was undertaken: a. the construction of substantial capital improvements on and to the pre-CGT asset in relation to which building allowance deductions were claimed (post-CGT assets); and b. installation of depreciable plant and equipment, in relation to which depreciation deductions were claimed. 4) In 2012, the Taxpayer entered into a contract of sale to dispose of its interest in the asset. 5) The Taxpayer obtained an independent valuation in relation to the value of the pre-CGT assets, the post-CGT assets and the depreciating assets as at the date of the contract of sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 108-D; | Income Tax Assessment Act 1997 section 108-60; | Income Tax Assessment Act 1997 section 108-70; | Income Tax Assessment Act 1997 section 110-25; | Income Tax Assessment Act 1997 section 116-40.

Reasons for decision: Summary: The capital proceeds in respect of the sale of the asset must be apportioned on a reasonable basis between the interests in the pre-CGT assets, the post-CGT assets and the depreciating assets. The proposed apportionment by the Taxpayer will be considered reasonable and therefore in conformity with subsection 116-40(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 108-D of the ITAA 1997 covers when assets become separate CGT assets. For CGT purposes there are exceptions to the common law principle that what is attached to the land is part of the land and rules about when a capital improvement to a CGT asset is treated as a separate CGT asset. Section 108-70 of the ITAA 1997 provides information on when a capital improvement is a separate asset. Subsection 108-70(3) of the ITAA 1997 states that capital improvements to a CGT asset (the original asset) that you acquired before 20 September 1985 that are related to each other are taken to be a separate CGT asset if the total of their cost bases when a CGT event happens in relation to the original asset is: a) more than the improvement threshold for the income year in which the event happened; and b) more than 5% of the capital proceeds from the event. Section 108-60 of the ITAA 1997 states that a depreciating asset that is a part of a building or structure is a separate asset from the building or structure. Because you acquired the asset prior to 20 September 1985 (pre-CGT) and extensions to the asset occurred post-CGT for the purposes of capital gains tax, the asset will be considered to be made up of three separate CGT assets. At the time of disposal the shopping centre consisted of the following assets: 6) the original asset - the pre-CGT asset; 7) the extensions - the post-CGT asset; and 8) the depreciating assets. While the initial construction (the pre-CGT asset) will be exempt from capital gains, the extensions and the depreciable assets will not. A CGT event A1 occurred when you disposed of the asset and a change in ownership occurred.The disposal of the asset resulted in a CGT event and hence capital gains tax will be payable upon the gain made on the disposal of the post-CGT assets and the depreciating assets. | Detailed Reasoning - Apportionment: Subsection 116-40(1) of the ITAA 1997 contains an apportionment rule which applies where a payment is received in connection with a transaction that relates to more than one CGT event. In such a case, the capital proceeds must be apportioned to determine the amount of capital proceeds that are reasonably attributable to each CGT event. In Taxation Determination TD 98/24 Income tax: capital gains: what are the CGT consequences of a CGT event happening to post-CGT real property if the property comprises separate CGT assets under Subdivision 108-D in Part 3-1 of the Income Tax Assessment Act 1997 (the 1997 Act) or if the property is sold with depreciable assets? (TD 98/24), the Commissioner ruled on the apportionment of consideration received on the disposal at one time of multiple CGT assets. If the property is disposed of under a contract and the parties are dealing with each other at arm's length, the agreed apportionment of the parties (whether at the time of contract or subsequently) will be accepted by the Commissioner. Accordingly, the apportionment in these cases need not reflect the precise values of the assets concerned. If there is no agreed apportionment, each party must make their own reasonable apportionment of the capital proceeds to the separate assets which have regard to the relevant market values of the assets at the time of the making of the contract. The Commissioner has stated that the written down values of depreciable assets will not necessarily be regarded as their market values. In certain cases an independent valuation may be appropriate, although it is not mandatory ( CGT Determination Number 9 Capital Gains: How do you apportion consideration received on the disposal of a composite asset? (TD 9)). Therefore, the capital proceeds in respect of the sale of the asset must be apportioned on a reasonable basis between the interests in the pre-CGT assets, the post-CGT assets and the depreciating assets. The Taxpayer has obtained an independent valuation in order to place a value on the pre-CGT assets, the post-CGT assets and the depreciating assets as at the date of the Contract of Sale to apportion the capital proceeds received from the sale of the asset.