Private ruling: capital gains tax - disposal of an asset to a wholly owned company
Published: November 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1:  | A1: 

Relevant facts and circumstances: You acquired a property with an existing dwelling located after 20 September 1985, and moved into the dwelling as soon as practicable. The title of the property was solely in your name. You had obtained a loan solely in your name to purchase the property. You occupied the dwelling as your main residence since it was acquired. A number of years after acquiring the dwelling, you decided that you wanted to demolish the existing dwelling and build a number of duplex's on the block, with you an your family occupying one of the duplex's, and the other duplex to be sold. You had construction drawings drafted up, with the local Council approving of the demolition of the existing dwelling and the erection of an attached dual occupancy. The Council did not give approval for the subdivision of the block, or strata title due to the smaller area size of the block, and in order to enable the dual occupancy status, the Council requested that you set up a home unit company. After a period of time, you incorporated a special purpose company, the Company. The Company had a number of shares, each giving the owner the exclusive right to occupy one dwelling to be designated by the Company. You were appointed the sole Director of the Company. A registered valuer was appointed and the property was valued on the date that the title of the property was transferred from your name to the Company for the consideration of the market value determined by the valuer on the date of transfer. In exchange for the transfer of your title in the property, you received the shares in the Company. The property remained on one title You did not make the rollover choice under subdivision 122-A when you disposed of the property to your wholly owned company. You paid stamp duty on the transfer of your interests in the property to the Company. You obtained a bank loan for construction costs to build the duplexes in your capacity as Director of the Company. You moved out of the existing dwelling after the title had been transferred to the Company. You entered into a contract with a builder to demolish the existing dwelling and to construct the duplexes. The contract outlined that construction was expected to be completed within one year, at which time you would moved into one of the duplexes. Building of the duplexes has been completed and you are now living in one of the duplexes. The duplex not occupied by you is vacant and on the market for sale. You have provided copies of a number of documents which form part of, and should be read in conjunction with this private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 118-130

Reasons for decision: Detailed Reasoning - Cost base of share: Subsection 110-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997)provides that the cost base of a CGT asset consists of five elements. Subsection 110-25(2) of the ITAA 1997 provides that the first element is the total of: The money you paid, or are required to pay, in respect of acquiring the CGT asset, and The market value of any other property you gave, or are required to give, in respect of acquiring it. | Detailed Reasoning - Application to your case: You acquired a property with an existing dwelling located on it after 20 September 1985. You resided in the dwelling for a period of time. You incorporated a special purpose company, the Company, to enable you to demolish the existing dwelling and construct a number of duplexes on the property. You were appointed the sole Director of the Company. The Company has shares, each giving the owner the exclusive right to occupy one dwelling to be designated by the Company. The property remained on the one title. A registered valuer was appointed and the property was valued on the date the property was transferred from your name to the Company. In exchange for the transfer of your title in the property, you received the shares in the Company. The cost base of your shares in the Company will be the value of the property you gave to acquire the shares. This amount should be apportioned between the shares. | Detailed Reasoning - Ownership Interest: Subsection 118-130 of the ITAA 1997 defines 'ownership interest' in land or a dwelling as: A legal or equitable interest in land or a right to occupy it; or For dwellings other than flats or home units, a legal or equitable interest in the land on which the dwelling is erected, or a licence or right to occupy the dwelling (e.g a leasehold interest or a licence arrangement in relation to retirement village);or A legal or equitable interest in a stratum unit, a licence or right to occupy it, or a share in a company that owns a legal or equitable interest in land on which a flat or home unit is erected and that gives you a right to occupy it. | Detailed Reasoning - Disposal of share in company: You can make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity. As outlined above, the disposal of a share in a company that owns the land on which the flat or home unit is erected that gives the shareholder a right to occupy the flat or home unit constitutes a CGT event in relation to the shareholder's ownership interest. Therefore, CGT event A1 will occur when you dispose of the share in the Company which gives the right to the exclusive occupancy in the vacant duplex. You will need to calculate the capital gain you have made on the disposal of that share. As you have not resided in the vacant duplex, any capital gain or loss is not disregarded under the main residence provisions. Note: All expenditure relating the original dwelling, such as interest on your loan, will not be included in the cost base of your shares, as those costs relate to the disposal of your main residence. As all of the expenditure in relation to the construction of the two duplexes has been incurred by the Company, you cannot include any of these costs in the cost base of your shares.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Question: Will the apportioned market value of your property on the date you moved out be the first element of the cost base of each of the shares you hold in 11 Burke Street Chifley Pty Ltd?