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Edited version of private ruling
Authorisation Number: 1011821375889
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Ruling
Subject: Pre-CGT land used to gain assessable income
Question 1
Will the separate building and structure on pre-CGT land be subject to capital gains tax upon sale?
Answer
Yes.
Question 2
Do you apportion the cost base of the separate asset from the capital proceeds upon sale of a property?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2011
The scheme commences on:
15 March 2011
Relevant facts and circumstances
You and your spouse purchased a property that is less than two hectares prior to 21 September 1985. You and your spouse built a house on this property in the 1990s. You and your spouse separated. Your spouse's share of the property and the house was transferred to you in accordance with court orders that satisfy the marriage break down rollover relief. You have lived in the house since it was built.
You will hire out the gardens of the property for functions. You will construct a facility separate to the house for this purpose (referred to as the garden facility). The garden will not be separated from the residence. The property and house will continue to be your main residence.
Question 1
Summary
Upon sale of the property, the garden facility will be subject to capital gains tax (CGT) as it is a separate asset.
Detailed reasoning
Assets acquired prior to 21 September 1985 are exempt from CGT. As outlined in section 126-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where an asset is transferred between spouses or former spouses in accordance with a court order, a rollover of the asset will occur. Assets that satisfy this rollover relief are deemed to be acquired when the spouse who originally owned the asset purchased it.
Buildings or structures constructed on pre-CGT land as outlined in subsection 108-55(2) of the ITAA 1997 are a separate asset provided the contract for construction was entered into after 21 September 1985 or, if there is no contract, construction commenced after the 21 September 1985.
In your situation you purchased the land with your spouse prior to 21 September 1985. Your spouse recently transferred their half of the land to you under a court order which satisfies the marriage rollover relief provisions. As a result, the land is a pre-CGT asset and not subject to CGT. The garden facility is an additional building or structure on the land and is therefore considered to be a separate asset that will be subject to CGT upon disposal.
Question 2
Summary
You will need to apportion the cost base of the garden facility from the capital proceeds upon sale of the property.
Detailed reasoning
The property is made up of three assets. These are the land, the house and the garden facility.
The land was purchased prior to the 21 September 1985 and is therefore a pre-CGT asset and not subject to CGT even though it is used to produce income.
Under the main residence exemption, a capital gain or capital loss made from a CGT event that happens to a dwelling is disregarded if the dwelling is your main residence throughout the period you owned it. Your house is your main residence and will be exempt from CGT for the period you reside in it.
The garden facility was built after 21 September 1985 and is used for income producing activities. It will therefore be subject to the CGT provisions.
You will need to break down these three assets and apportion them in a reasonable way to work out your capital gain or capital loss upon disposal. Only gains or losses from the garden facility will be subject to CGT provisions.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 100-25,
Income Tax Assessment Act 1997 Subsection 108-55(2),
Income Tax Assessment Act 1997 Section 116-40,
Income Tax Assessment Act 1997 Section 126-5 and
Income Tax Assessment Act 1997 Section 126-25.
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