ATO Interpretative Decision

ATO ID 2002/633

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does a capital gain or capital loss from CGT event C1 in section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) arise on the demolition of a dwelling if no capital proceeds are received?

Decision

No. The effect of the cost base rules in subsections 112-30(2) and (3) of the ITAA 1997 and the capital proceeds rule in section 116-25 of the ITAA 1997 is that no capital gain or capital loss arises when CGT event C1 happens on the demolition of a dwelling if no capital proceeds are received for it.

Facts

The taxpayer purchased a property (consisting of land and a dwelling) after 20 September 1985. The taxpayer later demolished the dwelling and subdivided the land into 2 blocks. The taxpayer did not receive any capital proceeds on the demolition of the dwelling.

The taxpayer commissioned a valuation of the dwelling and land prior to demolition by a registered valuer.

Reasons for Decision

CGT event C1 in section 104-20 of the ITAA 1997 happens if a CGT asset you own is lost or destroyed. The dwelling was not a separate CGT asset because none of the balancing adjustment provisions in subsection 108-55(1) of the ITAA 1997 applied to it. However the note to subsection 104-20(1) of the ITAA 1997 makes it clear that CGT event C1 can apply to part of a CGT asset.

Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property.

Therefore, on the demolition of the dwelling CGT event C1 will happen.

Subsection 104-20(3) of the ITAA 1997 provides that you make a capital gain from CGT event C1 if the capital proceeds from the loss or destruction are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Capital proceeds

The taxpayer did not receive any capital proceeds on the demolition of the dwelling. Further, section 116-25 of the ITAA 1997 provides that the market value substitution rule does not apply to CGT event C1.

Cost base

As a CGT event has happened to only part of the taxpayer's asset, the taxpayer will be required to apportion the cost base or reduced cost base between the land and the dwelling using the apportionment rules in subsections 112-30(2), (3) and (4) of the ITAA 1997. Because the taxpayer received no capital proceeds, the combined effect of these provisions is that no amount is apportioned to the cost base /reduced cost base of the dwelling.

Subsection 112-30(5) of the ITAA 1997 is an exception to the application of these apportionment rules. It provides that an amount that forms part of the cost base or reduced cost base of an asset is not apportioned if, on the facts, that amount is 'wholly attributable' to the part to which the CGT event happened or to the remaining part.

No amount of the acquisition cost of the property or of the demolition costs in this case are wholly attributable to the demolished dwelling. Although a valuation of the property carried out after its acquisition might be the basis for making a reasonable apportionment it did not disclose an amount that was 'wholly attributable' to the acquisition of the dwelling.

As the capital proceeds from the demolition were nil and the cost base attributed to the dwelling is nil, the taxpayer will not make a capital gain or capital loss from CGT event C1 in section 104-20 of the ITAA 1997 on the demolition of the dwelling.

Amendment History

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 104-20
   subsection 104-20(1)
   subsection 104-20(3)
   subsection 108-55(1)
   section 112-30
   subsection 112-30(2)
   subsection 112-30(3)
   subsection 112-30(4)
   subsection 112-30(5)
   section 116-25

Related Public Rulings (including Determinations)
Taxation Determination TD 1999/79
Taxation Determination TD 93/180

Keywords
Capital gains tax
CGT events C1-C3 - end of a CGT asset
Real estate subdivision

Siebel/TDMS Reference Number:  CIC300854; 1-5CILW65

Business Line:  Small Business/Individual Taxpayers

Date of publication:  6 June 2002

ISSN: 1445-2782