What are the tax implications if unused common property is converted into a unit and sold?

This is quite a common issue we come across these days. There are significant income tax and GST issues associated with proceeding with this course of action that should be considered. The CTS is planning on altering the roll by including common property as a new unit. As the unit would qualify as new residential property, the sale of the new unit would attract GST. The sale of common property is addressed in the ATO ruling on bodies corporate. In that ruling, the ATO express the long held view that common property is held by the CTS as agents or trustees for the owners. Accordingly, the sale of the unit would be subject to income tax and this income tax would be payable by the owners in accordance with their unit entitlements. The cash would stay inside the CTS.

How this transaction will be taxed in the hands of the owners will depend on the motivation of the CTS in developing and selling the unit. If there is a profit motivation, it is possible the gain on sale will be on revenue account and no CGT discount would apply. If there was no profit motivation, then it would be assessed on capital account and it is possible a CGT discount could apply if owners have owned their units for more than 12 months.

The transaction is taxable to owners despite not receiving the proceeds on the basis a benefit is received in the form of lower future levies. If the CTS wanted to distribute this gain to owners, if it was the result of a profit or gain, this could be considered an appropriation of profits or a dividend. There are sections in the Income tax act that prevents double taxation.