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Edited version of your private ruling
Authorisation Number: 1012477653460
Ruling
Subject: Capital gains tax - cost base and subdivision
Questions and answers
1. If you build on each parcel of land and sell one a few years later, is the cost base for capital gains the new site value plus construction costs?
No
2. If you sold each parcel of land after subdivision, can you deduct the subdivision and demolition costs from any capital gain?
Yes
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You inherited a property.
Your intentions are to subdivide the property and build.
The property was acquired by the deceased after 20 September 1985.
There is currently a dwelling on it.
It is currently being rented out.
It is not your main residence.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 110-25.
Income Tax Assessment Act 1997 Section 104-10.
Income Tax Assessment Act 1997 Section 104-20.
Income Tax Assessment Act 1997 Section 116-20
Reasons for decision
Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event
Cost base
The cost base of a CGT asset consists of five elements, each element forms part of the total cost base of the asset. You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset.
Briefly, the elements of the cost base are:
1. The actual amount you paid to acquire the asset.
2. Any incidental costs of acquiring the asset, and costs in relation to its disposal; including cost of transfer, stamp duty, legal fees, agent, valuer, accountant fees.
3. Non-capital costs you incur in connection with your ownership, e.g. interest on money borrowed to acquire an asset, costs of maintaining, repairing or insuring the asset, rates and land tax. However, you can only include non-capital costs of ownership if they could not have also been claimed as a deduction.
4. Capital expenditure you incur to preserve or increase the value of the asset.
5. Capital expenditure you incur to establish, preserve or defend your title to the asset.
To get more information on what is included in these element go to ato.gov.au and search for the guide to capital gains tax.
Acquisition from a deceased estate
Generally, assets inherited through a deceased estate are acquired on the date of death.
For the interest that was acquired by the deceased after 20th September 1985 the first element of the cost base of this interest in the beneficiaries hands is the deceased's cost base on the day they died.
Subdivision
Subdivision itself is not a CGT event. Therefore, the acquisition date of the subdivided blocks will be the date that you acquired the property.
The cost base for each of the interests in the property is 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 cost base between the new blocks (that is, on an area basis or relative market value basis).
A reasonable apportionment of the cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case.
The costs of subdivision should 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 value of the blocks. However, any costs 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 sold), should be attributed solely to that block.
Sale of subdivided blocks
CGT event A1 will occur upon the disposal of the subdivided blocks Therefore, CGT may be payable upon disposal of the subdivided blocks.
Dwelling and land are considered to be a single asset unless one of the provisions of the Income Tax Assessment Act 1997 applied to the CGT event. The entire original cost base of the land and dwelling become the cost base for the land only.
The demolition of a dwelling is deemed to be a CGT event C1 loss or destruction of a CGT asset. If the individual does not receive any capital proceeds (i.e. money or property) in respect of the demolition of the existing dwelling, none of the CGT capital proceeds modification rules apply.
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. This is the case even if the demolition costs are incurred merely to facilitate the construction of another building.
If an individual can show at the time a subsequent CGT event happens to the land, that the expenditure on demolition is reflected in the state or nature of the asset then the expenditure will be included in the fourth element of the taxpayer's cost base.
The capital costs of building the new dwelling can be included in the fourth element of the cost base.
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