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

Ruling: Q1: Does the dissolution of a Body Corporate and its separation into a number of freehold properties constitute a capital gains tax (CGT) event? | A1: No.

Relevant facts and circumstances: The Body Corporate is considering dissolution. You purchased a lot in the relevant financial year. Your title registration confirmation reflects this. The Body Corporate has obtained planning permission from the local council to dissolve the Body Corporate and replace it with several separate freehold titles comprising each existing owner's title plus a small portion of the common use area to enable unencumbered access to the street. Since the council approval the current owners of units have prepared a budget to cover all works and legal costs to achieve freehold based on the council approved plan. A unanimous vote by owners is now required under Body Corporate rules to enable the dissolution to proceed. The unit is not your principal residence. You use it as a holiday home. You have been advised by a Government department that transfer duty (stamp duty) will apply only to the portion of common use land added to each freehold title. Further, the transfer of title from existing lots to freehold will not involve a change of ownership.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 120-20 | Income Tax Assessment Act 1997 subsection 109-5(1)

Reasons for decision: Summary: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). In this case, the Body Corporate has obtained planning permission to dissolve the Body Corporate and replace it with separate freehold titles. You will retain ownership of your original property and acquire additional common use land. As there will be no change in ownership a CGT event will not occur when the replacement freehold title is issued to you.