Edited version of your private ruling

Authorisation Number: 1012530259215

Subject: Capital gains tax - destruction - roll-over relief

Question 1:

Is a roll-over available for any capital gain you made on receiving an amount of money as compensation for a dwelling destroyed by a cyclone due to expenditure being incurred on a replacement dwelling?

Answer:

Yes.

Question 2:

If you build a new dwelling on land you already own, do you have to wait 12 months before you dispose of the newly constructed dwelling to be eligible for a discount capital gain?

Answer:

No.

Question 3:

Are you able to roll-over the proceeds from the sale of the cyclone affected land and purchase another block of land?

Answer:

No.

Question 4:

Do you require separate valuations for the house and land?

Answer:

Yes.

Question 5:

Are you able to use the local council land valuations to determine the valuation of the house and land?

Answer:

No.

Question 6:

Is there a timeframe for the purchase of a replacement property?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts:

You purchased an investment property after 20 September 1985.

The property was substantially destroyed as a result of a natural disaster.

You lodged a claim with your insurer and received a payment to compensate you for the destruction of the property.

The compensation payment that you received included a component for extra costs that are incurred when rebuilding in a cyclonic area. You also received a payment for loss of rental income.

You will demolish the remaining part of the property and dispose of the vacant land.

You will not receive any additional payment for the demolition of the property.

You purchased a separate block of land in the 2010 income year and will use the compensation proceeds to build an investment property on this block of land.

You have supplied a number of documents which forms part of this private ruling

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

Income Tax Assessment Act 1997 section 124-75

Income Tax Assessment Act 1997 section 124-85

Income Tax Assessment Act 1997 subsection 124-85(2)

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. 

Destruction of property

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

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.

Cost base of destroyed dwelling

Under section 112-30 of the ITAA 1997, when there is only a partial disposal (or in this case, destruction) of a CGT asset, then the cost base needs to be apportioned between the part that has been destroyed and the part that remains. In order to calculate that portion of the cost base that relates to the part of the asset that was destroyed, the following calculation is used:

Cost base of whole asset x Capital proceeds for the CGT event happening to the part
Those capital proceeds plus the market value of the remainder of the asset

This is the part of your original cost base that relates to the dwelling that was destroyed by the cyclone. You would use this amount to establish whether you have made a capital gain from the proceeds received from the insurance claim.

Market valuation of remaining asset (land)

In order to determine the cost base for the destroyed dwelling, you must determine the market value of the remaining portion of the original asset (i.e. the land) at the time that the dwelling was destroyed by the cyclone.

Where the market value of an asset needs to be determined, you can choose to:

(i) obtain a detailed valuation from a qualified valuer; or,

(ii) compute your own valuation based on reasonably objective and supportable data.

Once the cost base of the destroyed dwelling and land together has been established, the cost base for the destroyed dwelling alone can be determined and the exact amount of the capital gain relating to the destruction of the dwelling can then be calculated.

Cost base of remaining land

The remainder of the cost base (i.e. the cost base of the whole asset (destroyed dwelling & land) less the cost base of the destroyed dwelling) is the amount attributable to that part of the asset that was not affected by the event, in your case the land.

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.

Effect on cost base of replacement asset

If the money received from the C1 CGT event (the insurance proceeds) is not more than the expenditure incurred to acquire the replacement asset, then in accordance with item 3 of the table in subsection 124-85(2) of the ITAA 1997 any capital gain from the CGT event will be disregarded and the first element of the cost base for the replacement asset will be reduced by the amount of that capital gain.

Note: some of your expenditure on a replacement asset must be incurred to acquire the new CGT asset by you no later than 12 months after the end of the income year in which the original CGT asset was destroyed.

Sale of the replacement asset

Upon disposal of the replacement asset an A1 CGT event will happen. From this a capital gain may be calculated by deducting the first element of the cost base (as reduced by the above rolled over capital gain from the C1 CGT event) together with any of the other remaining cost base elements.

As the land has been held for at least 12 months the CGT 50% discount may apply. Unless any other specific CGT discounts or concessions apply this capital gain will be returned in the year in which the disposal takes place.

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