Edited version of private ruling

Authorisation Number: 1011829170624

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Ruling

Subject: capital gains tax - subdivision of land and property title transfer

Question

Are you liable for capital gains tax upon the subdivision and resulting title transfer of your property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and sibling A inherited a 25% ownership interest in a property as part of a deceased estate.

The remaining 50% ownership interest was held by sibling B and C.

Sibling B and C sold each of their 25% ownership interest in the property to you and sibling A in equal shares.

You provided a statement that the market value of the property was a specified amount on the date the property was transferred to you and sibling A. This market value was used to determine the ownership interest acquired under the terms of your parent's Will and the acquisition from sibling B and C.

The 50% purchase price included the transfer costs. Your 25% ownership interest in the property was purchased for a specified amount.

You and sibling A held a total ownership interest of 50% each.

During the specified income year, sibling A sold their 50% ownership interest in the property to your child and their spouse for a specified amount, being 50% of the market value.

You, your child and their spouse applied for a subdivision of the property into two allotments. The application was approved.

Two property titles were issued . Your child and their spouse were listed as joint tenants for one property. Your property titled listed you as the sole tenant of the second property.

The original dwelling was demolished. No capital proceeds were received as a result of the destruction of the capital gains tax (CGT) asset.

A new dwelling was constructed on each of the separate vacant blocks of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-3,

Income Tax Assessment Act 1997 Section 102-5,

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10 and

Income Tax Assessment Act 1997 Section 104-20.

Reasons for decision

Capital Gains Tax

You make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset. Any assessable capital gain realised is included in your tax return, along with your other income, which is taxed at your marginal tax rate.

You dispose of an asset when a change of ownership interest occurs from you to another entity. The time of the event is when you enter into the contract of sale, or if there is no contract, when the change of ownership occurs. The disposal of a CGT asset, such as property, will result in a CGT event A1 occurring.

Ownership

There are several components in the process of converting land from being a multiple occupancy owned by various co-owners as tenants in common into two separate properties.

Each of these components must be separately analysed to determine whether there is a taxing point; and the consequences, and/or options that then present themselves.

Immediately prior to the commencement of the process, there was essentially one asset being the overall property with each of you owning various interests in the whole of it. From an individual perspective, each of the interests that each owner held in the whole property is a separate CGT asset.

Subdivision

The first component of the conversion process is the subdivision.

If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Generally, subdividing land does not result in a CGT event. However, if as a result of the transaction whereby joint owners each now have sole ownership of an individual block, each owner is taken to have disposed of his or her interest in the subdivided block now owned by the other. There has been corresponding acquisitions, by each owner from the other, of that interest in land now owned by each of them which was previously owned by the other.

In your situation, you held a 50% ownership interest in the original property. Your child and their spouse purchased sibling A's 50% ownership in the original property, giving each of them a 25% ownership interest. The original property was subdivided into two separate lots.

The following example from Taxation Determination 92/148 (TD 92/148) which is enclosed, can be compared to your own situation:

A and B were joint owners of a one hectare block of land acquired in 1986. In 1992, they subdivide the land. A took a one-half hectare block (block 1) and B took the other one-half hectare block (block 2). A acquired a 50% interest in land constituted by block 1 in 1986 and acquired the remaining 50% interest from B in 1992. Similarly, B acquired a 50% interest in the land constituted by block 2 in 1986 and acquired the remaining 50% interest from A in 1992.

A and B have each disposed of their 50% interest in that land constituted by blocks 2 and 1 respectively, in 1992.

When the subdivision was approved, two separate blocks of land were created; each block of land is considered a separate CGT asset with its own property title. You hold sole ownership in one of the subdivided blocks of land and your child and their spouse hold joint ownership in the second subdivided block of land. The effect of the property transfer results in your disposal of your 50% ownership of the original property to acquire 100% ownership of the subdivided block of land. As you have disposed of an ownership interest of the original property to your child and their spouse, a CGT event A1 has occurred. You are liable for any capital gain made upon the disposal.

Within the Income Tax Assessment Act 1997 (ITAA 1997) there are no provisions that give the Commissioner the discretion to disregard a capital gain that has been made on the disposal of land.

Calculating your capital gain

You make a capital gain if your capital proceeds are greater than your cost base, for example, if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base is greater than your capital proceeds.

When working out if you have made a capital gain or a capital loss you must first establish the cost base of the asset. This is then subtracted from the capital proceeds to work out the capital gain or capital loss.

The following elements are considered when working out the cost base for an asset.

· Money or property given for the asset;

· Incidental costs of acquiring the CGT asset or that relate to the CGT event;

· Costs of owning the asset;

· Capital costs to increase or preserve the value of your asset or to install or move it; and

· Capital costs of preserving or defending your ownership of or rights to your asset.

You need to work out the amount for each element above, and then add them together to work out the cost base of your CGT asset.

Discount method

In certain circumstances, you may be eligible to reduce the amount of tax payable on a capital gain. The CGT discount allows individuals to pay tax on only half of any capital gain they make on assets owned for at least 12 months.

To meet the eligibility criteria for the discount you must:

· be an individual;

· have held the asset for longer than 12 months;

· have disposed of the asset after 11:45am ACT legal time on 21 September 1999; and

· did not choose to use the indexation method.

How to work out your capital gain or capital loss

Work out your capital proceeds from the CGT event.

Work out the cost base for the CGT asset.

Subtract the cost base from the capital proceeds.

If the proceeds exceed the cost base, the difference is your capital gain.

If the proceeds do not exceed the cost base, work out the reduced cost base for the asset.

If the reduced cost base exceeds the capital proceeds, the difference is your capital loss.

If the capital proceeds are less than the cost base but more than the Reduced cost base, you have neither a capital gain nor a capital loss.

For the purposes of the ruling, an example calculation based on the facts provided determines your taxation liability. You purchased a 25% ownership interest in the original property from your siblings for a specified amount including acquisition costs. Your cost base for the 25% property purchased from your two siblings is the total of these amounts. The cost base of the 25% inherited as part of a deceased estate is ¼ of the market value of the property. The market value of your 50% ownership interest in the property on the date the title was transferred into your name was a specified amount (amount B) with your 50% ownership interest disposal to your child and their spouse being ½ this amount (amount A). You have owned the CGT asset for more than 12 months and are entitled to discount your capital gain by 50%. Your net capital gain is calculated as:

amount A - amount B = net capital gain

50% discount

Your net capital gain should be included in your notice of assessment for the year in which the CGT event occurred.

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