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Edited version of private ruling

Authorisation Number: 1011579871685

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Ruling

Subject: Capital gains tax (CGT) - Subdivision of land

1. Will any capital gain or capital loss you make from the sale of your original interest in the subdivided block be disregarded?

Yes.

2. Will any capital gain or capital loss you make from the sale of your new interest in the subdivided block be disregarded?

No.

3. Will the cost base of your new interest in the subdivided block include its market value as at the transfer date plus half the costs of subdivision?

Yes.

This ruling applies for the following period<s>:

2010-11 income year

The scheme commences on:

1 July 1986

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You acquired a property with your former spouse before 1985. The property was your main residence till your separation just after 1985. After this and to the present time, the property has been used by you and your children as your main residence.

Per an order of the Family Court of Australia dated after 1985, your spouse's half share of the property was transferred to you as trustee for your children. You, in an indenture, declared that you hold a moiety of one half of the property as trustee for the children.

You now wish to give your children their half share of the property, but wish to stay in the same location. You thus intend to demolish the house, subdivide the property, retain one block for yourself and build a new residence on it for you, sell the other block and pay your children out their share of the property.

For the purpose of this private ruling, the trustee will transfer their interest in the property to you prior to the subdivision taking place.

You will then demolish the house, subdivide the property, retain one block for yourself and build a new residence on it while selling the other block and paying your children out their share of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 960-100

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

Any capital gain or capital loss you make from the sale of your original interest in the subdivided block will be disregarded.

Detailed reasoning

The property will consist of four separate and distinct assets once the subdivision is complete.

This reflects the subdivision of the property into the block you are keeping and the block you are selling as well as the different times that you acquired interests in it being your original interest bought before 1985 and the new interest transferred to you by the trustee.

The assets are:

This first question deals only with your original interest in the block you are selling.

You disregard any capital gain or capital loss you make from the sale of your original interest in the block you are selling because you acquired it before 20 September 1985 - it is a pre-CGT asset.

Question 2

Summary

You cannot disregard any capital gain or capital loss you make from the sale of your new interest in the subdivided block.

Detailed reasoning

This second question deals only with your new interest in the block you are selling.

For any capital gain or capital loss you make from the sale of your new interest in the block to be disregarded, it must either be:

Neither of these exemptions will apply to the sale of your new interest in the block.

You will acquire your new interest in the property when the trustee transfers it to you so it can't be a pre-CGT asset.

You are selling the block as vacant land so it can't qualify for any main residence exemption. (You would have to be selling a dwelling for the exemption to be available.)

Question 3

Summary

The cost base of your new interest in the subdivided block will include its market value as at the transfer date plus half the costs of subdivision.

Detailed reasoning

The cost base of an asset is generally based on the amounts that are incurred by the owner in acquiring, holding, improving and selling it.

The costs of subdivision are an example of a capital expense that is incurred to increase or preserve the property's value.

However, the market value of the asset is used instead of the direct acquisition cost where the owner and the previous owner were not dealing at arm's length from each other, or where there is no payment in respect of the transfer.

The transfer from the trustee to you will be both a 'non-arm's length' transfer and a transfer for no value. Therefore, the market value substitution rule will apply.

The market value is worked out as at the date of transfer.

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