1012396661515 | Legal database

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Authorisation Number: 1012396661515

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Subject: Capital gains tax - demolition of rental property - disposal

Question:

Is the capital gain made on the disposal of property A disregarded?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts:

You purchased a property (property A) after 20 September 1985.

You resided in property A for a number of years, until you and your spouse purchased another property (property B).

You rented property A for a number of years.

The tenants prior to vacating property A caused considerable damage to the property, to the extent that you decided to demolish the dwelling on property A.

You did not receive any proceeds from the demolition.

You retained the tenant's bond, for unpaid rent and to cover some of the damage. You did not have insurance to cover the damage.

You will sell the vacant block of land.

You will not make an absence choice in relation to property A

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 112-30

Income Tax Assessment Act 1997 section 116-25

Income Tax Assessment Act 1997 section 118-110

Reasons for decision:

Capital gains tax (CGT) is the tax you pay on any capital gain you make and include on your annual income tax return. You make a capital gain or capital loss if and only if a CGT event happens.

Demolition

CGT event C1 happens if a CGT asset you own is lost or destroyed. CGT event C1 happened on the voluntary destruction, or demolition, of the dwelling located on property A.

You make a capital gain from CGT event C1 happening 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.

As a CGT event will happen to only part of your asset, you will be required to apportion the cost base or reduced cost base between the land and the dwelling using the apportionment rules.

As you received no capital proceeds from the demolition of the dwelling on property A, the combined effect of these provisions is that no amount is apportioned to the cost base / reduced cost base of the demolished dwelling. All of the original cost is apportioned to the now vacant land.

As the capital proceeds from the demolition will be nil and the cost base attributed to the property is nil, you will not make a capital gain or capital loss on the demolition of the property.

Note: Section 116-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the market value substitution rule does not apply to CGT event C1.

Sale of land

The sale of an asset (in this case, a block of land) will trigger CGT event A1. As you did not receive any compensation or insurance amount in respect of the land on which the property was constructed, there is no roll-over choice available for the capital gain made on the sale of the land and accordingly the capital gain will need to be included in your income tax return. Additionally as you are selling vacant land, the main residence provisions do not apply and the capital gain can not be disregarded

As you owned the property for more than 12 months, purchased it before 21 September 1999 and will sell it after this date, you are eligible to use the discount method to calculate your net capital gain. The net capital gain to be included in your assessable income is calculated by reference to your total non-exempt capital gain multiplied by 50%.

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