CGT on Strata Titled Apartment Block and Land

Question

Our strata unit (and PPOR) is one of a block of four in one building. We have owned it since new in 1988, and it comprises 25% of the total complex property value, including all land, car parks, gardens, pool area etc. The other 3 units are divided into 1x 33%, and 2x 21% values. All 4 units have extensive river views.

The strata council has voted unanimously to subdivide off a section of 463 sq metres for sale. This land contains at present the pool and sauna, and a pavilion/meeting room, together with landscaped gardens. These would cease to be available to the existing owners, as they would be cleared for sale of the new green title block.

Planning permission has been granted for the new green title, subject to certain conditions which should pose no problems. The proceeds of the sale would be used to carry out much needed maintenance and repairs to the existing main building. No funds would be returned to individual owners.

A reputable real estate agent has valued the green title area block at $1.2 to $1.4m as a cleared block. The cost of clearing is estimated at up to $175,000.

The question is: How is CGT calculated and apportioned on the proceeds of the sale of the subdivided land in this case?

The potential figure can be very high according to some “experts”, who are asking a fortune for advice. My own experience in business matters over many years has been that advice is sometimes more expensive than the actual charges involved. The standard of expertise has ranged from sensible to ridiculous, with the estimates given to match.

Answer

My problem with your question, as you know from my request for more information, is that I know nothing about body corportate/ strata plan law. That part is outside the realm of this service but I am more than happy to help you with the CGT side of the question and give you references. I have done some research on the body corporate issue and this is what I have found out. Not being my area of expertise I cannot guarantee it is correct but have moved forward to the CGT question on the basis that the body corp does not own the property that is sold.

My reason for concluding that the body corp does not own the property that was sold is as follows:

1) I sent this email to Michael Teys a NSW body corp lawyer.
On 31/05/2011, at 3:07 PM, "Julia Hartman" <julia@bantacs.com.au> wrote:
Michael
I hope you remember me from the night Chris Gray did Margaret’s show and the email I sent you on section 118-42.

I have a CGT question that I am having trouble answering because it involves a body corporate and I don’t understand the legal standing of a body corporate. In this case the body corporate has arranged to sell off some of the common property (land) the proceeds of the sale will be used by the body corporate for improvements to other common property. My simple understanding of strata plans is that the title entitles the owner a share of the common property and for that matter even airspace. So I am thinking it is not the body corporate making the sale at all but the owners so a CGT event to them and then they make a contribution to the body corp after paying the CGT as the main residence exemption can’t apply.
Could you please tell me if there is anything I should know about body corps that could affect this conclusion?
2) Michael then responded with:
Julia , your assessment is correct . The position of the body corporate is different in each state because of the basis on which the common property is held ,. What state are you in ?

3) I got no further response from Michael once I said you were in WA. I do not have connections in WA. I have had a look on the web and found the following page useful.
http://www.acebodycorp.com.au/info/wa/what-is-a-strata-company/
I would expect that it would not talk about the body corporate in this fashion if the body corporate actually owned any of the common property.

So if you agree with me that the body corporate does not actually own the property, instead it is the individual unit holders in accordance with their lot allocation as mentioned on the web page, this is how the CGT will work:

Because the sale of the land was not connected with the sale of your principle place of residence ie to the same person at the same time, then your main residence exemption cannot cover it and you will be up for CGT on your share of the proceeds of the sale in accordance with your allotment. Reference:
Subdivision 118-B – Main residence
Rules that may limit the exemption
SECTION 118-165
118-165 Separate CGT event for adjacent land or other structures ITAA 36

The exemption does not apply to a *CGT event that happens in relation to land, or a garage, storeroom or other structure, to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the *dwelling or your *ownership interest in it.

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You will need to apportion the cost base for your unit between the unit and remaining common property and the common property sold. It would probably be more economical for the body corporate to hire a valuer to give you a basis of that apportionment. Don’t forget to include a portion of the buying costs such as stamp duty and the clearing costs and a portion of any body corporate levy paid to improve the area. Unfortunately, because you purchased the property before 20th August, 1991 you can not increase the cost base by any costs of ownership ie maintenance and normal body corporate fees. You will need to look for body corporate fees intended to improve the value of the property not maintain it.
It maybe worth mentioning to other owners in the block who purchased after that date that they can increase their cost base by ownership expenses (section 110-25(4)ITAA 1997) such as a portion of interest on their home loan. This will include a portion of body corporate fees paid to date but not the fees paid by the proceeds of the sale because they will not be used to improve or maintain what is sold.







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