Private ruling: Sale of part of common property within Retirement Village
Date of advice: 27 November 2015
Published: February 2016
Ruling period: 2015-16 income year | 2016-17 income year
Date scheme commenced: 1 July 2009

Ruling: Q1: Upon the sale of the common property, will there be a capital gains tax (CGT) event for you? | A1: No. | Q2: Will there be income tax consequences for you where the sale proceeds are used to reduce strata levies in the future? | A2: No.

Relevant facts and circumstances: The Retirement Village and ownership The Retirement Village is a strata titled retirement village and the land has been the subject of a strata subdivision. It is believed that the development began in the 1980's. The strata plan consists of some hundreds of separate dwellings and a number of apartments, as well as a large area of common property, part of which contains a community centre and other amenities, and the balance of which is vacant land. Historically, the developer of the village sold units in the strata plan to residents by transferring the title to the resident, making them registered interest holders under the Retirement Villages Act 1999 (RV Act). Under this system, residents were also owners for the purpose of the Strata Schemes Management Act 1996 (SSM Act). In the more recent past, the village operator has bought back units from residents as they have moved out of the village, and has leased them back to new residents. Under this system, the operator is the owner under the SSM Act and the resident retains certain rights under the RV Act. The operator currently owns the majority of the lots in the strata scheme. Therefore, the operator holds the majority of the unit entitlement of the Owners Corporation, most of which is made up of units leased to residents and subject to the proxy provision set out above. The Village therefore consists of: • Units where the resident owns the strata title of their unit • Units which are owned by the operator and leased to residents (proxy units), and • Units that are owned by the operator but remain vacant (other units) The purchase offer The owners have been approached by a provider of residential aged care services with a proposal to purchase some of the vacant common property land in order to construct and run a residential aged care facility (RACF) on that land. Some pertinent details of the offer are as follows: • The proposed RACF land will be subdivided from the common property of the strata plan to form a new strata title lot • The new lot will be sold to the provider for its current market value • The sale is subject to the subdivision being approved and registered • It is also subject to a change in by-laws excluding the new lot from any maintenance levies It is proposed at this stage that the sale proceeds be kept in the sinking fund in order to pay for certain other works around the village. Assumptions For the purpose of this private ruling, it is assumed that the sale will occur during the period of this ruling. For the purpose of this private ruling, it is assumed that the sale proceeds will be placed into the sinking fund. For the purpose of this private ruling, it is assumed that the strata levies will be decreased as a result of the receipt and use of the sale proceeds.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 and | Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision: Summary: There will not be a CGT event for you upon the sale of the common property. | Detailed Reasoning - Detailed reasoning: The main capital gains provisions are contained in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997). In general terms, the application of the capital gains provisions is based on three components: • An identified CGT asset • A taxpayer (the owner of the identified CGT asset), and • A CGT event (which generally happens to the identified CGT asset). Section 102-20 of the ITAA 1997 states: You can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event. This case considers the subdivision of land with the sale of some of it. The subdivided land is a CGT asset. Section 108-5 of the ITAA 1997 states: (1) A CGT asset is: a. Any kind of property, or b. … (2) To avoid doubt, these are CGT assets: a. Part of, or an interest in, an asset referred to in subsection (1), b. … The issue in this case relates to whether or not you are the owner of the subdivided land. Section 104-10 of the ITAA 1997 states: (1) CGT event A1 happens if you dispose of a CGT asset. (2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. … The point made clear by the text of subsection 104-10(2) of the ITAA 1997 is that the CGT provisions apply to the owner of the CGT asset immediately before the CGT event happens. The situation in this case is that the subdivided land to be sold is part of the common property in a strata title scheme. Draft Taxation Ruling TR 2015/D1 about income tax matters relating to bodies corporate constituted under strata title legislation makes the following observations about ownership of the common property: 80. The ownership of the common property varies under different State Acts and Territorial Ordinances: • in Queensland, Victoria, Western Australia and South Australia the ownership is vested in the proprietors as tenants in common in proportions equal to their lot entitlements • in New South Wales and the Australian Capital Territory the ownership is vested in the strata title body as agent for the proprietors as tenants in common in proportions equal to their lot entitlements, and • in South Australia, Tasmania and the Northern Territory the ownership is vested in the strata title body as trustee for the proprietors as tenants in common in proportions equal to their lot entitlements. 81. Although the ownership of the common property varies between the States and Territories, the administration, control, and management of that property is vested by all State/Territory Acts in the strata title body in its own right. 82. Whether the strata title body or the proprietor are assessable on moneys received in respect of the common property (for example, fees derived from the letting of shops situated on the ground floor of a block of apartments where the ground floor forms part of the common property) varies according to the relevant State strata title legislation. It will depend on whether: • the common property is vested in the proprietors • the common property is vested in the strata title body as agent for the proprietors, or • the strata title body holds the common property as trustee on behalf of the proprietors. 83. In those States/Territories where the common property is vested in the proprietors or vested in the strata title body as agent for the proprietors, the income derived from the use of the property constitutes assessable income of the individual proprietors. This is considered to be so even in those States/Territories where the strata title legislation prevents a proprietor from ever taking physical receipt (other than on winding-up) of the moneys, and where the moneys are paid directly into one of the strata title body's funds. In these cases, proprietors receive a benefit in that the amount needed to be levied on the proprietors by the strata title body as contributions to the administrative or other fund would be reduced by the rental income applied directly to the fund. To the extent money is applied or dealt with for the benefit of the proprietor subsection 6-10(3) of the ITAA 1997 would apply to include these amounts as assessable income of the proprietors. Expenses attributable to the derivation of the income from the common property, including depreciation, would be allowable to the proprietors in proportion to their lot entitlement and to the extent of the revenue producing use of the individual lots. 84. In those States/Territories, where the strata title body holds the common property as trustee on behalf of the proprietors, money received from the use of the common property is derived on behalf of the proprietors as beneficiaries. The treatment of income in these circumstances is governed by Division 6 of the ITAA 1936. Further, Taxation Ruling TR 93/32 about the division of net income or losses between co-owners of rental properties notes: 42. Any capital gain or loss should also be apportioned on the same basis as the rental income or loss. As the retirement village is situated in New South Wales, the ownership of the common property is vested in you as agent for the proprietors as tenants in common in proportions equal to their lot entitlements. As you are not the owner of the common property under the relevant New South Wales state law, you are not the owner for capital gains purposes either. | Summary: There will not be income tax consequences for you where the sale proceeds are used to reduce strata levies in the future. | Detailed Reasoning - Detailed reasoning: As stated in paragraph 83 of Draft Taxation Ruling TR 2015/D1 in relation to rental income, the sale proceeds will be considered to have been received by the legal owners of the common property and then contributed to the sinking fund. Subsection 103-10(1) of the ITAA 1997 states: This Part and Part 3-3 apply to you as if you had received money or other property if it has been applied for your benefit (including by discharging all or part of a debt you owe) or as you direct. Draft Taxation Ruling TR 2015/D1 states: Amounts contributed by proprietors - application of the mutuality principle 16. An amount that is otherwise assessable to the strata title body will not be included in its assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the principle of mutuality applies. 17. Amounts levied on proprietors by a strata title body in accordance with the State or Territory Acts which form part of a fund used for the day to day expenses, general maintenance and repair of common property or for the establishment of special purpose funds as set out under those Acts are mutual receipts and therefore are not assessable to the strata title body. 18. Whether other receipts from members are mutual receipts depends on the nature of the transaction and must be decided on the facts and circumstances of each dealing by a process of evaluating and weighing a range of factors. Relevant considerations may include: • The relationship between an amount received by the strata title body and the common fund - that is, whether it is within matters that govern the mutual relationship between members such that it has the requisite link to the common fund. • The purpose for which the payment is made - that is, whether the payment of an amount by a member to the strata title body is to meet the member's proportion of their mutual liabilities. • The capacity in which an amount is paid - that is, whether the member's dealing with the strata title body is within their role as a member. Contributions to the sinking fund that are sourced from the sale of the vacant land are considered to be mutual income and therefore will not be assessable to you.