Does the transfer of your ownership interest in Unit X, X address give rise to a capital gains tax (CGT) event under section 104 of the Income Tax Assessment Act 1997 , where no money was exchanged and your previous co-owner now has sole ownership of the duplex previously held jointly in equal shares?
Yes. This ruling applies for the following period : Year ending 30 June 20YY The scheme commenced on: DD MM 20YY
In 20YY, you and Person B purchased vacant land at 51 X address for $XX,XXX as tenants in common in equal shares. In 20YY you and Person B entered into a building contract to construct Split Level Attached Dual dwellings. In MM 20YY you received a notice of commencement from X Builders X Pty Ltd T/as X Build Investments. In MM 20YY the construction of the 2 new dwellings on the property were completed and you received the Occupation Certificate. On DD & DD MM 20XX, a lease for Unit 2 was entered into with the tenant to move into the property on DD MM 20YY. On DD MM 20YY, a lease for unit 1 was entered into with the tenants to move into the property on DD MM 20YY. You have reported in your 20YY, and 20YY tax returns rental income and expenses from both dwellings. In January 20YY you entered into a Partition Agreement where the original block of land was to be subdivided into 2 blocks with you obtaining 100% ownership interest in block X with Unit X and Person B obtaining 100% ownership of block X and Unit X. At no time were you advised that by not retaining the same ownership interest in both blocks of land that this would result in a CGT event.
Income Tax Assessment Act 1997 s ection 104-10
Detailed reasoning Capital gains tax Section 108-5 provides that a CGT asset is any kind of property or a legal or equitable right that is not property. You make a capital gain or capital loss when a CGT event happens to a CGT asset. You need to know your cost base in order to work out whether you make a capital gain or loss. The cost base of a CGT asset is generally the cost of acquiring the asset, plus certain other costs associated with holding and disposing of the asset (section 110-25). CGT provisions The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property, or a legal or equitable right that is not property. When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event. Each of the new subdivided lots will retain the acquisition date of the original asset.
CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. Taxation Determination 92/148 sets out 1. Upon initial acquisition and before the subdivision of the land by the former joint owners, each acquired a 50% individual interest in the whole land. 2. After the subdivision, both owners have a 50% interest in each of the subdivided blocks. As there has been no change in ownership of the subdivided land, there is no acquisition or disposal for CGT purposes (see CGT Determination No. 7). 3. However, as a result of the transaction whereby each now has sole ownership of an individual block, each owner is taken to have disposed of his or her 50% interest in the subdivided block which is now owned by the other. With a corresponding acquisition by each owner of an additional 50% interest in the property they now solely own. Application to your situation In your case you and Person B purchased vacant land with the intention of constructing 2 dwellings and renting them out as tenants in common in equal shares. The dwellings were completed and available to be rented in the 20YY-20YY financial year.
The first lease for the dwellings commenced in July 20YY, and you reported rental income from both dwellings (Unit 1 and Unit 2) in your 20YY-YY, and 20YY-YY tax returns. You and Person B decided to subdivide the original parcel of land into 2 new blocks, after the subdivision you changed your ownership interest from 50/50 in each block to you owning Unit X 100% and Person B owning Unit X 100%. The subdivision of the land is not a CGT event, the CGT event A1 occurred for you when you transferred your 50% ownership interest in Unit X to Person B in the land title. While no money changed hands between you and Person B for the subdivision and the property title transfer, as you no longer have an ownership interest in land and dwelling known as Unit X you cannot claim rental income from Unit X thus you have disposed of your ownership interest and are now must report the CGT in your 20YY tax return. Subsection 104-10(4) of the ITAA 1997 provides that a capital gain will arise if the capital proceeds from the disposal are more than the asset's cost base and a capital loss will arise if the capital proceeds are less than the asset's reduced cost base.