Issue
Is the cost, under Subdivision 40-C of the Income Tax Assessment Act 1997 (ITAA 1997), of the taxpayer's interest in a depreciating asset forming part of the common property of an existing residential unit complex located in the Australian Capital Territory (ACT) nil if they started to hold the asset as a result of the enactment of the Unit Titles Act 2001 (ACT) (UTA 2001)?
Decision
Yes. The cost, under Subdivision 40-C of the ITAA 1997, of the taxpayer's interest in a depreciating asset forming part of the common property of an existing residential unit complex located in the ACT they started to hold as a result of the enactment of the UTA 2001 is nil.
Facts
The taxpayer acquired a unit in a residential complex located in the ACT prior to 6 October 2001. The unit has been used to produce rental income since its acquisition.
Under this type of strata title development, the owner's corporation becomes the holder of an estate of leasehold in the common property on registration of the units plan. The unit owners are members of the owners corporation which is a separate legal entity with specified powers, authorities, duties and functions.
Common property is that part of a strata plan not comprised in any owner's lot and includes both fixed and moveable property and facilities intended for common use. The common property may include depreciating assets and buildings and other structures.
The enactment of the UTA 2001, with effect from 6 October 2001, resulted in the estate of leasehold in the common property, including existing common property, in strata title developments in the ACT being held by the owners corporation as agent for the unit owners as tenants in common. Under the former act, Unit Titles Act 1970 (ACT) (UTA 1970), common property was held by the owners corporation (formerly body corporate) as trustee for the unit owners as tenants in common.
Reason for Decision
Broadly speaking, section 40-25 of the ITAA 1997 allows to a holder of a depreciating asset an annual deduction for the decline in value of the asset.
As a result of the enactment of the UTA 2001, the taxpayer starts to hold a depreciating asset forming part of the existing common property.
Subsection 40-35(1) of the ITAA 1997 applies to a depreciating asset that is held by more than one entity. It treats each entity's interest in the underlying asset as if the interest were itself the underlying asset. This means that the taxpayer's interest in a depreciating asset that forms part of the common property is treated as if that interest is the underlying asset. One consequence of this is that the taxpayer must work out the cost of the depreciating asset that is their interest.
The amount of the decline in value of a depreciating asset is worked out by reference to the cost of the asset. Cost consists of two elements, first and second element, and is worked out under Subdivision 40-C of the ITAA 1997. The first element of cost is worked out as at the time when the asset starts to be held while the second element is worked out after that time.
The first element of cost is, in certain circumstances, an amount specified in the table in section 40-180 of the ITAA 1997 or, more generally, the amount taken to have been paid under section 40-185 of the ITAA 1997.
No item in the table in subsection 40-180(2) of the ITAA 1997 applies to the taxpayer's circumstances. The amount the taxpayer is taken to have paid to hold their interest in a depreciating asset forming part of the existing common property must, therefore, be worked out under section 40-185 of the ITAA 1997.
Because the taxpayer started to hold a depreciating asset forming part of the existing common property as a result of the enactment of the UTA 2001, the taxpayer did not pay any amount or incur any liability to hold the asset. Therefore, there is no amount taken to have been paid under items 1 or 2 of the table in subsection 40-185(1) of the ITAA 1997. Similarly, no other item in that table applies.
As no item in the tables in subsections 40-180(2) or 40-185(1) of the ITAA 1997 applies, the cost to the taxpayer to hold a depreciating asset forming part of existing common property is nil.