Private ruling: Capital gains - disposal of a CGT asset
Published: August 2013
Ruling period: 1 July 2013 - 30 June 2016
Date scheme commenced: Not yet commenced

Ruling: Q1: Will the transfer of the property, except for the portion on the ground floor, to NFP1 for an amount give rise to a CGT event under Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If the answer to question 1 is yes, based on the valuation provided, what will be the estimated capital gains? | A2: $xxx | Q3: Will the transfer of portion on the ground floor of the property a non-for-profit (NFP2) organisation for an amount give rise to a CGT event under Part 3-1 or 3-3 of the ITAA 1997? | A3: Yes | Q4: If the answer to question 3 is yes, based on the valuation provided, what will be the estimated capital gains? | A4: $xxx

Relevant facts and circumstances: In 19XX you and your spouse purchased a warehouse/office building. Upon your spouse's death, you became the sole owner. There have been few capital improvements to the property. The current mixed use zoning permits construction of a new residential building plus basement. You intend to donate to a not for profit (NFP1) organisation, not a deductible gift recipient (DGR) with which you have had no formal/informal relationship, the entire site and all development rights except certain portion on the ground floor of the new residential building, to which you will retain title. The warehouse/office building will be converted to a strata title residential building. The portion of the ground floor is to be retained by you will require total fit-out and upgrade works before occupation. Upon completion of the construction/fit-out and upgrade works, you intend to sell your portion to a NFP2 organisation at full commercial value. Any sale would include a caveat and separate title document. This NFP organisation is not a registered DGR. According to the Valuer General's records, the aforementioned land tax valuation of $xxx per sq m is assumed to be based on the development potential of the site as a stand alone residential building. The approximate potential value of ground floor strata title is valued to be $xxx at the time the contract is signed.

Relevant legislative provisions: Income Tax Assessment Act 1977 section 104-10, | Income Tax Assessment Act 1977 section 108-5, | Income Tax Assessment Act 1977 section 110-25, | Income Tax Assessment Act 1977 section 112-25, | Income Tax Assessment Act 1977 section 112-30, | Income Tax Assessment Act 1977 section 116-20, | Income Tax Assessment Act 1977 section 116-30 and | Income Tax Assessment Act 1977 section 128-15.

Reasons for decision: Summary: The transfer of the property, except for the portion on the ground floor, to NFP1, will give rise to a CGT event A1 under section 104-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: For the CGT provisions, Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997), to be applicable, there needs to be a CGT event that happens to a CGT asset. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as: a) any kind of property, or b) a legal or equitable right that is not property. In your case, the land and building (property) comes within paragraph (a), and the right to develop the land and building comes within paragraph (b) of the definition. Therefore, you have CGT assets to which a CGT event may happen. If a CGT asset is split into 2 or more assets, each of the split assets are new CGT assets (paragraph 112-25(1)(a) of the ITAA 1997). The splitting of a CGT asset is not a CGT event (subsection 112-25(3) of the ITAA 1997). A CGT event will happen if any of the new CGT assets are disposed of. This will constitute the happening of a CGT event A1 (section 104-10 of the ITAA 1997). Likewise, if 2 or more CGT assets are merged into a single asset (a new CGT asset), a CGT event does not happen (subsection 112-25(4) of the ITAA 1997). A CGT event will happen if the new CGT asset or part of the new CGT asset is disposed of. This will, constitute the happening of a CGT event A1 (section 104-10 of the ITAA 1997). The reason the splitting or merging of CGT assets does not constitute a CGT event is that the splitting or merging does not result in a change of ownership. That is, the owner(s) of the original asset is the owner of the new asset(s). Therefore, the splitting of the property to enable you to retain the portion on the ground floor of the building does not result in the happening of a CGT event. However, the disposal (transfer) of the property and the contractual right to a NFP1 organisation does constitute the happening of a CGT event. Upon the disposal (transfer) a CGT event A1 will happen as there is a change of ownership. CGT event A1 under section 104-10 of the ITAA 1997 will occur when you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that a disposal happens when there is a change of ownership in respect of a CGT asset. Subsection 104-10(3) of the ITAA 1997 provides that the timing of the event will be when the contract is entered into, or if there is no contract when the change in ownership occurs. | Summary: Based on the valuation and information provided, the estimated capital gain is $xxx. | Detailed Reasoning - Detailed reasoning: Section 102-20 of the ITAA 1997 states when you make a capital gain or loss only if a CGT event occurs. As determined in question 1 the transferring of part of the property and the right to develop the property constitutes the happening of a CGT event A1 (section 104-10 of the ITAA 1997). Subsection 104-10(5) of the ITAA 1997 states you make a capital gain from the happening of a CGT event A1 if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base. Therefore, to determine if you have made a capital gain on the transfer of part of the property and the right to develop the property, the cost base of the assets, and the capital proceeds on their disposal need to be determined. The capital proceeds received from the happening of a CGT event are determined under Division 116 of the ITAA 1997. The general rules regarding capital proceeds are found in section 116-20 of the ITAA 1997. This section states that the capital proceeds are the total of a) the money received or are entitled to receive, in respect of the CGT event; and b) the market value of any property you have received or are entitled to receive, in respect of the event happening (worked out as at the time of the event). There are modifications to the general capital proceeds rule. The first of these modifications is, if you receive no capital proceeds, the capital proceeds cannot be valued or the capital proceeds are more or less than the market value and the parties to the transfer are not dealing at arms length, you are taken to have received the market value of asset (section 116-30 of the ITAA 1997). In your situation you are transferring the property and the right to develop the property to a NFP1 organisation. As you will receive less than the market value for the assets you will be taken to have received the market value only if you and NFP1 are not dealing with each other at arm's length in connection with the transfer. If it is considered that you are dealing at arm's length your capital proceeds for the transfer will be the amount received, (subparagraph 116-30(2)(b)(1) of the ITAA 1997). However, if it is considered that you are not dealing at arm's length you will be taken to have received the full market value at the time of the transfer. Therefore, the modification to the general capital proceeds rules in section 116-30 of the ITAA 1997 may apply so that you are taken to have disposed of the assets for their market value at the date of transfer. For the purpose of this ruling it is assumed you and NFP1 are dealing with each other at arm's length in respect of the transfer. The cost base of a CGT asset is determined (calculated) in accordance with subdivision 110-A of the ITAA 1997. Subsection 110-25(1) of the ITAA 1997 states that there are 5 elements that make up the cost base, unless any of the cost base modification rules in Division 112 of the ITAA 1997 apply. The 5 elements of the cost base are: · Element 1 (subsection 112-25(2) of the ITAA 1997): The money paid to acquire a CGT asset; and the market value of any property you gave to acquire the asset. · Element 2 (subsection 112-25(3) of the ITAA 1997): Incidental costs. · Element 3 (subsection 112-25(4) of the ITAA 1997): Non-capital costs of owning a CGT asset (but only acquired after 20 August 1991). · Element 4 (subsection 112-25(5) of the ITAA 1997): Capital expenditure incurred to increase or preserve the asset value or that relates to installing or moving the asset. · Element 5 subsection 112-25(6) of the ITAA 1997: Expenditure incurred to establish, preserve or defend the title to a CGT asset. Your cost base for the assets as a whole (ignoring development costs and any other costs other than the actual purchase price) is: a) your original half share in the property (subsection 110-25(2) of the ITAA 1997) plus b) your spouse's share of the property inherited on their death (subsection 128-15(4) of the ITAA 1997). As you did not transfer the full property, but retained a portion, the cost base needs to be apportioned. The cost base apportionment rules are contained in section 112-30 of the ITAA 1997. Subsection 112-30(3) of the ITAA 1997 provides a formula to be used to calculate the cost base for the portion of the asset disposed of. The formula is: Capital proceeds for the CGT event happening to the part Cost base of asset x ---------------------------------------------------------------------------- Those capital proceeds plus the market value of the remainder of the asset Therefore, the capital gain made on the transfer of all except the portion of the property is: $xxx. Note: The capital gain will be a discount capital gain as per Division 115 of the ITAA 1997. | Summary: The transfer of the portion on the ground floor of the property to a non-for-profit (NFP2) organisation will give rise to a CGT event A1 under section 104-10 the ITAA 1997. | Detailed Reasoning - Detailed reasoning: CGT event A1 under section 104-10 of the ITAA 1997 will occur when you dispose of a CGT asset, the transfer of the portion on the ground floor of the new strata title of the residential building to a NFP2 organisation. | Summary: Based on the information provided, the estimated capital gain is $xxx. | Detailed Reasoning - Detailed reasoning: As mentioned in the answer for question 1, the splitting of the asset so that you can retain the portion does not constitute the happening of a CGT event. It is the transfer of the portion of the property to a NFP2 organisation that will result in the happening of a CGT event, CGT event A1 (section 104-10 of the ITAA 1997). As per question 2 it is assumed you and the NFP2 organisation are dealing with each other at arm's length in respect of the transfer of the portion of the property. You will receive the market value for the disposal (transfer) of the portion of the property (section 116-20 of the ITAA 1997). The cost base of the portion will be the remainder of the cost base not allocated to the remainder of the property transferred to NFP2 plus under the fourth element of the cost base, the amount paid for the fit-out costs of the offices and community facilities. Hence, the capital gain made on the transfer of the portion of the property will be: market value minus cost base. Note: as per Q2 the capital gain will be a discount capital gain as per Division 115 of the ITAA 1997. | Summary: Unable to rule