Edited version of your private ruling

Authorisation Number: 1012093251120

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Ruling

Subject: Capital gains tax - disposal of units and capital gains tax discount method

Question: Can you use the 50% capital gains tax (CGT) discount method to calculate your capital gain on the disposal of your units?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

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.

Some time after 20 September 1985 you purchased a single residential dwelling for investment purposes.

You have demolished the original dwelling and a number of residential units are being construction on the land.

You are disposing of the units.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-55

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Section 110-25

Reasons for decision

The most common CGT event (CGT event A1) happens if you dispose of a CGT asset, such as property to someone else. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

CGT event A1 will occur upon disposal of your units.

Generally, a dwelling and land are considered to be a single asset.

Demolition

The demolition of a dwelling is deemed to be a CGT event C1 loss or destruction of a CGT asset.

Upon demolition the cost base is wholly attributable to the land where no proceeds are received for the demolition of the original dwelling. The entire original cost base of the land and dwelling become the cost base for the land only.

The entire original cost base of the land and dwelling become the cost base for the land only.

Note: you will not make a capital gain or a capital loss due to the demolition of the existing dwelling.

The construction of the new units is considered an improvement to the land and it is not treated as a separate asset, you will be taken to have acquired the new units on the date you acquired the land.

Subdivision of land

For CGT purposes, the subdividing of land does not change the ownership of the subdivided blocks. Therefore, you will not make a capital gain or capital loss at the time of subdivision.

However, you may make a capital gain or capital loss when you dispose of your interest in the subdivided blocks or when a CGT event occurs. The date you acquired your interest in the subdivided blocks is the date you would have acquired your interest in the original land.

In your case, your acquisition date is the date you originally acquired the investment property.

A capital gain will be made on the disposal of each of the subdivided blocks if the amount received from the disposal is greater than the cost base of that block. A capital loss will be made on the disposal of each of the subdivided blocks if the amount received from the disposal is less than the reduced cost base of that block.

You are not required to obtain a property valuation at the time of subdivision. The cost base of the original land needs to be apportioned between the subdivided blocks on a reasonable basis. A reasonable apportionment of the original cost of the land itself can usually be achieved on an area basis if all the land is similar in size and the market value or a relative market value basis if this is not the case.

Therefore, the first element of the cost base of the vacant blocks should be worked out by apportioning the cost base of the property between the block of land containing the dwelling and the vacant blocks of land. The enclosed Taxation Determination TD 97/3 provides information on how these costs are apportioned.

The costs of subdivision incurred should also be apportioned between the blocks. If the blocks are of unequal market value, the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks.

However, any cost solely related to one block should be attributed to that block (for example the costs of connecting electricity and water to the block which is to be disposed should be attributed solely to that block).

Calculating Capital Gains and Losses:

You make a capital gain if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

Calculating Capital Proceeds

The capital proceeds of a CGT event is the money received or your are entitled to receive in respect of the event happening, or the market value of any property received in respect of the event happening.

Calculating Cost Base

The cost base of a CGT asset is made up of five elements:

1. money or property given for the asset

2. incidental costs of the CGT event, or of acquiring the CGT asset. You cannot include costs if you:

o have claimed a tax deduction for them in any year, or

o omitted to claim a deduction but can still claim it because the period for amending the relevant assessment has not expired.

3. cost of owning the asset. You do not include such costs if you acquired the asset before 20 August 1991. Nor do you include them if you:

o have claimed a tax deduction for them in any year, or

o omitted to claim a deduction but can still claim it because the period for amending the relevant assessment has not expired.

4. capital costs associated with increasing the value of your asset or to install or move it

5. capital costs of preserving or defending your ownership of or rights to your asset.

The fourth element of the cost base includes capital expenditure you incurred to increase an asset's value.

The time for determining whether demolition costs can be included in the cost base of the land is when a subsequent CGT event happens to the land. If the costs of demolition of the original dwelling are reflected in the state or nature of the property at the time of the subsequent CGT event, the expenditure will fall within the fourth element. This is the case even if the demolition costs are incurred merely to facilitate the construction of another building.

As you have owned the investment property for more than 12 months you can choose to use the discount method to calculate any potential capital gain. The discount percentage of 50% is applied to any capital gain after you have offset any capital losses that you may have in the income year and any unapplied net capital losses from earlier years. Generally this method enables you to reduce your capital gain by half.

For more information as to how to calculate your capital gain or capital loss please see chapter 2 of the enclosed Guide to capital gains tax 20010-11 (NAT 4151-6.2010). Further information is also available on our website - www.ato.gov.au.

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