Edited version of your private ruling

Authorisation Number: 1012463949888

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Ruling

Subject: Capital gains tax

Questions and answers:

1. Will the capital gains tax (CGT) provisions apply to a property which is your main residence?

No.

2. Will the CGT provisions apply to a property that is not your main residence?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You recently purchased a house after 19 September 1985.

You intend to live in the house for six months or more.

You moved into the house as soon as practicable after you purchased it.

All services are connected, postal delivery to the house, address changed on electoral roll.

You intend to demolish the current house.

The current house land size is less than 2 hectares.

You intend to move out into a rental property for about 12 months and sub-divide the block into two blocks.

You intend to build a house on each of the blocks and live in one as your main residence and sell the other block and house.

You intend to move into the newly built house as soon as it is complete and live there for at least X months from this date.

Each sub-divided block will be less than two hectares.

You intend to make an election under section 118-50 of the Income Tax Assessment Act 1997 to treat the land as your main residence for the days up until the house is constructed.

The house will not be used to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 112-25.

Income Tax Assessment Act 1997 Section 112-30.

Income Tax Assessment Act 1997 Section 116-25.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-150.

Income Tax Assessment Act 1997 Subsection 104-20(3).

Reasons for decision  

You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it.  

You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it.

Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate.

Main residence exemption

You can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence.

To qualify for the full exemption from CGT:

§ The residence must have been your home for the whole period that you owned it.

§ You must not have used the dwelling to produce assessable income.

§ The land the dwelling is situated on must be 2 hectares or less in size.

§ You must have moved into the dwelling as soon as practicable after you purchased the dwelling.

In your case, you moved into the dwelling as soon as practicable after you purchased it, the land is less than 2 hectares and the dwelling has been your main residence for the whole of your ownership period.

You intend to live in the dwelling for about 6 months prior to demolishing the dwelling. All services will be connected and postal delivery will come to the dwelling.

For the 6 month period prior to the demolition of the dwelling a main residence exemption is available to you.

Demolition of a dwelling

Subsection 104-20(3) of the Income Tax Assessment Act 1997 (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.

Capital proceeds

You did not receive any capital proceeds on the demolition of the dwelling. Further, section 116-25 of the ITAA 1997 provides that the market value substitution rule does not apply to CGT event C1.

Cost base

As a CGT event has happened to only part of the taxpayer's asset, the taxpayer will be required to apportion the cost base or reduced cost base between the land and the dwelling using the apportionment rules in subsections 112-30(2), (3) and (4) of the ITAA 1997. Because the taxpayer received no capital proceeds, the combined effect of these provisions is that no amount is apportioned to the cost base reduced cost base of the dwelling.

Subsection 112-30(5) of the ITAA 1997 is an exception to the application of these apportionment rules. It provides that an amount that forms part of the cost base or reduced cost base of an asset is not apportioned if, on the facts, that amount is 'wholly attributable' to the part to which the CGT event happened or to the remaining part.

No amount of the acquisition cost of the property or of the demolition costs in this case are wholly attributable to the demolished dwelling. Although a valuation of the property carried out after its acquisition might be the basis for making a reasonable apportionment it cannot disclose an amount that was 'wholly attributable' to the acquisition of the dwelling.

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

Subdivision of land

When you subdivide a block of land, each smaller block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing the land does not in itself change the ownership of the subdivided blocks. Therefore, you do not make a capital gain or loss at the time of subdivision. 

You are taken to have acquired the subdivided blocks when you acquired the original land and dwelling. 

Apportionment

On subdivision of the land into smaller blocks, the cost base of the land needs to be apportioned between the smaller blocks (section 112-25 ITAA 1997). 

Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning costs between different assets, for example, area basis or valuation. 

Where you subdivide land the Commissioner considers that survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market values of the blocks. 

The costs of connecting electricity and water, to an individual block that is to be sold, may be attributed solely to that block.

Sale of dwelling

The sale of a dwelling results in a CGT event A1 occurring. Section 104-10 of the ITAA 1997 provides that an A1 event happens if you dispose of a CGT asset. A disposal occurs if there is a change of ownership. The time of the event is when you enter into the contract for the sale of the property.

When you sell the dwelling that is not your main residence you will need to work out the cost base of the dwelling (taking into account the apportionment discussed above) to enable you to calculate the capital gain or loss. The CGT provisions will apply to this capital gain or loss.

Extension of main residence exemption 

You will qualify for a full main residence exemption for a dwelling that was built to replace a main residence that was demolished or destroyed provided you make a valid choice under section 118-150 of the ITAA 1997, and satisfies certain conditions.

Ordinarily where a dwelling is demolished or destroyed and a new dwelling is constructed, the main residence usage of the first dwelling would not count towards an exemption for the new dwelling and land.

However if you build a dwelling to replace a demolished or destroyed main residence and make a choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling is constructed as your main residence from the time that the demolished or destroyed dwelling was last occupied by you, the two dwellings may be treated as one and the main residence usage of the former will count towards the main residence exemption for the new dwelling and land provided:

· the original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income, and it was on land covering 2 hectares or less;

· the new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it, and the period is at least 3 months; and

· the period starting from when you stopped occupying the previous dwelling and ending when the new dwelling becomes your main residence is four years or less.

The effect of making a choice under section 118-150 of the ITAA 1997 in these circumstances will be that there is an unbroken period of occupancy of a main residence on the land from the time when the first dwelling became your main residence until the new dwelling ceases to be your main residence.

In your case there will be an unbroken period of occupancy on the land as there will be not more than four years between the time the demolished or destroyed dwelling was last occupied and the time the new dwelling became your main residence. Further, the original dwelling was your main residence for the period you owned it, was not used to produce assessable income, situated on land less than 2 hectares, and the new dwelling became your main residence as soon as practicable after it was completed and this period is for at least three months

You will be entitled to a main residence exemption for the 6 month period you lived in the dwelling prior to its demolition, for the period where the new dwelling is being constructed, and for the time the new dwelling is your main residence.

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