Private ruling: Capital gains tax
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the capital gains tax (CGT) provisions apply to the 'sale' of the common room by issue of new shares in accordance with the company constitution? | A1: No | Q2: Will the CGT provisions apply to the sale of the whole property to a developer? | A2: Yes

Relevant facts and circumstances: The company was incorporated prior to 20 September 1985 with the intention of acquiring the property. The property consists of a number of apartments and associated garages and a building known as the 'common room'. There is one title for the whole of the property. Shares in the company are grouped and allocated to each apartment and their associated garages, the holders of each group of shares are entitled to the right of exclusive occupation and possession of the relevant apartment and garage. Each of the shareholders is also a director of the company. The common room is used by the directors on occasion. This room is large enough to be converted into an apartment subject to all the relevant approvals. Only one member has held their shares since prior to September 1985, this member holds shares in relation to one of the apartments. It is proposed to 'sell' the common room to a third party by way of issuing new shares in accordance with the company's constitution. The new shares would give the new shareholder the right to occupy the common room as their own apartment and the right to use and enjoy any other common areas of the property. The proceeds received from the new share issue would be invested to pay for the maintenance and up-keep of the entire property. It is not intended to use the proceeds for the internal maintenance of the apartments or garages. An alternative proposal is to sell the entire property to a developer. There is no intention to convert the property into a new strata plan or change to current company structure prior to either of the two proposals.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 149-15 | Income Tax Assessment Act 1997 Section 149-30

Reasons for decision: Summary: A taxpayer can make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). Each CGT event is numbered in Division 104 of the ITAA 1997. The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from that taxpayer to another entity. This change can be the result of some act or event, or by operation of law. In the case of CGT event A1, the entity that has disposed of a CGT asset will realise the capital gain or loss. Subsection 104-10(4) of the ITAA 1997 provides that for CGT event A1, you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. However, Division 149 of the ITAA 1997 outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 will be treated as being acquired after that date for CGT purposes. Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of: · more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and · more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset. Although the property was acquired prior to 20 September 1985, the majority underlying interests have changed since that date. In accordance with subsection 149-30(1) of the ITAA 1997, the property would have stopped being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not held by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. Therefore, any capital gain made in relation to the disposal of the property, cannot be disregarded under paragraph 104-10(5)(a) of the ITAA 1997. The company is a stratum unit company as described in Taxation Ruling TR 97/4. A stratum unit company is a company that is the registered proprietor of a building or property. The unit 'owner' owns a block of shares in the company carrying with it the right to occupy a defined portion of the building. Under this type of arrangement, each member has contractual rights arising from his or her ownership of the shares in the company but has no interest in the land or building. Accordingly, it will be the company that will be liable for any CGT should a CGT event occur in relation to the property. Under the first proposal, the company would issue new shares to a third party for the right to occupy the common room. The arrangement does not constitute a disposal of the asset; it is merely an adjustment or variation of the rights of the existing shareholders to the extent that they would no longer have use and enjoyment of the common room. No CGT event occurs as a result of a company issuing new shares; therefore, this proposal would not attract any CGT liabilities. Under the second proposal, the company would sell the entire property to a developer. This proposal would involve a disposal of the CGT asset, the property, and trigger CGT event A1. Accordingly, the company would be liable for CGT on any capital gain made from the disposal of the property.

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