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Authorisation Number: 1012388717082

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Ruling

Subject: Capital gains tax and subdivision of land

Questions and answers:

If you gift your interest in an investment property to a related party for no consideration will you be taken, for the purposes of CGT, to have received the market value of your interest?

Yes

Did you make a capital gain or capital loss from the demolition of the original building?

No

Is the capital gain or capital loss made on the disposal of the townhouse disregarded?

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You acquired an investment property after 2000

The land attached to the dwelling does not exceed two hectares.

The dwelling has been used for income producing purposes.

The ownership proportion is X% to you and Y% to person A.

You are intending to demolish the original house and build two town houses on the block.

You will not receive any proceeds from the demolition of the dwelling

You will subdivide the block into separate titles.

You are currently intending to keep both townhouses as rental properties.

As the building costs have been higher than first thought you are considering disposing of one of the townhouses to reduce the loan.

Relevant legislative provisions

Reasons for decision

CGT event C1 happens if a CGT asset you own is lost or destroyed. 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.

No proceeds were received for the demolition therefore no capital gain or loss is made on the demolition

Subdivision of land

The subdivision of land itself does not constitute a CGT event as there is no change of ownership. It is at the time of the disposal that any capital gain or capital loss may arise. Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets. Therefore, the subdivided blocks will retain the acquisition date of the original property.

The cost base of the original property will be apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks (that is, on an area basis or relative market value 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 of similar size and market value or on a relative market value basis if this is not the case. Costs such as survey, legal fees and application fees should be apportioned in accordance with the methodology used to apportion the cost base of the land. However, costs which relate solely to a particular lot (such as connection of electricity, water and construction costs) are attributable solely to the lot to which those costs relate.

Disposal of townhouse

In your case you own X% of each block of land created by the subdivision of your land and person A owns Y% of each block of land rather than owning one block each.

If two or more taxpayers own an asset jointly, CGT applies separately to each of the taxpayers' interests in the asset.

If you were to gift your ownership interest of one of the townhouses to person A they would acquire 100% of that asset. You would only have X% interest in the other property. Subsection 104-10(2) of the ITAA 1997 states that a disposal takes place if a change of ownership occurs from a taxpayer to another entity.

It is not necessary that there be an exchange of cash for a CGT event to occur. The capital proceeds from a CGT event includes the market value of any other property you have received, or are entitled to receive in respect of the event happening (subsection 116-20(1) of the ITAA 1997). Section 116-30 of the ITAA 1997 provides that if you receive no capital proceeds from a CGT event, you are taken to have received the market value of the asset at the time of the event.

As your interest in the property was acquired after 20 September 1985 and the property was not your main residence by the time of this CGT event, you can not disregard any capital gain or capital loss that you make upon the disposal of your interest in the townhouse.

In your case, you own X% of an investment property - a CGT asset. When you gift your percentage of the investment property to a related party a CGT event will occur as there will be a change of ownership when the title is transferred.

As no consideration is to be paid on the disposal, section 116-30 of the ITAA 1997 will deem the capital proceeds to be the market value of your share of the investment property when the title is transferred.

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