ATO Interpretative Decision

ATO ID 2003/228

Income Tax

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Issue

Does the taxpayer start to hold, under section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997), a depreciating asset forming part of the common property of an existing residential unit complex located in the Australian Capital Territory (ACT) as a result of the enactment of the Unit Titles Act 2001 (ACT) (UTA 2001)?

Decision

Yes. The taxpayer starts to hold, under section 40-40 of the ITAA 1997, a depreciating asset forming part of the common property of an existing residential unit complex located in the ACT as a result of the enactment of the UTA 2001.

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 owners 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.

The table in section 40-40 of the ITAA 1997 identifies a holder of a depreciating asset in any particular circumstance. In broad terms, a holder of a depreciating asset is its economic owner. In most cases, the economic owner will also be the legal owner.

In the ACT where land is held as leasehold from the Crown, the Crown is the legal owner of improvements fixed to the land. The owner of the leasehold estate, however, has a quasi-ownership right (as defined in subsection 995-1(1) of the ITAA 1997) over the land. In its capacity as trustee under the UTA 1970, the owners corporation held the estate of leasehold in the common property and, therefore, had a quasi-ownership right over the common property.

The table in section 40-40 of the ITAA 1997 provides that the owner of a quasi-ownership right over land is, in certain circumstances, a holder of a depreciating asset that is fixed to the land or is an improvement to the land. In particular, item 2 of the table provides that:

A depreciating asset that is fixed to land subject to a*quasi-ownership right (including any extension or renewal of such a right) where the owner of the right has a right to remove the asset

is held by

The owner of the quasi-ownership right (while the right to remove exists).

The owners corporation has a right to remove a depreciating asset forming part of the common property.

Before the enactment of the UTA 2001, the owners corporation satisfied the requirements of item 2 of the table in section 40-40 of the ITAA 1997 and was a holder of a depreciating asset forming part of the common property.

Taxation Ruling IT 2505, entitled Bodies Corporate Constituted Under Strata Title Legislation, referred to approaches taken at the time by the various States and Territories with regard to the ownership of common property in strata title developments. It noted the difference between common property being held as agent for the unit owners and common property being held as trustee for the unit owners.

Following the enactment of the UTA 2001, the owners corporation holds a depreciating asset forming part of the common property as agent for the unit owners. In accordance with IT 2505, each unit owner is a holder of such assets from that time.

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 each unit owner will treat their interest in a depreciating asset forming part of the common property as if their interest is the depreciating asset.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 40-25
   subsection 40-35(1)
   section 40-40
   subsection 995-1(1)

Related Public Rulings (including Determinations)
Taxation Ruling IT 2505

Related ATO Interpretative Decisions
ATO ID 2003/224
ATO ID 2003/225
ATO ID 2003/226
ATO ID 2003/227
ATO ID 2003/229

Other References:
Unit Titles Act 2001 (ACT)
Unit Titles Act 1970 (ACT)

Keywords
Capital Allowances CoE
Decline in value
Deduction for depreciating assets
Economic owner
Hold a depreciating asset
Holder of an item of plant
Interest in underlying asset
Quasi-ownership right
Uniform capital allowance system

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 April 2003
Date reviewed:  4 June 2014

ISSN: 1445-2782