Edited version of your written advice

Authorisation Number: 1012666014419

Ruling

Subject: Capital gains tax - subdivision

Question 1

Is the capital gain made on the sale of vacant land, after demolition of a dwelling which was your main residence, disregarded?

Answer

No.

Question 2

Is the cost base of the subdivided blocks calculated by including:

• an apportioned cost base of your original property when originally acquired calculated on a 'reasonable basis', plus

• apportioned costs of demolition, plus

• apportioned costs of subdividing the blocks, plus

• allocated site specific costs attributable solely to each block.

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You purchased your property after 20 September 1985 and it is your main and only residence.

You are considering subdividing your land which does not exceed 2 hectares in size.

The current house is in the middle of the existing block and would need to be demolished and the site cleared.

You would then sell one of the newly-created blocks to fund the construction of your new main dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-10

Income Tax Assessment Act 1997 Section 102-5

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 110-25

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 Section 118-110

Reasons for decision

Capital gains tax

Capital gains tax (CGT) is income tax paid on any net capital gain made as the result of a CGT event taking place. CGT events are the different types of transactions that may result in a capital gain or capital loss.

As a general rule whenever a CGT asset, such as property that was acquired after 20 September 1985, is sold (or otherwise disposed of), the vendor will be subject to the CGT provisions and will need to determine whether a capital gain or capital loss has resulted.

Main residence

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that was your main residence. To get the full exemption from CGT:

• the dwelling must have been your home for the whole period you owned it

• you must not have used the dwelling to produce assessable income, and

• any land on which the dwelling is situated must be two hectares or less.

However, the exemption does not apply if part of the land is disposed of separately to the dwelling.

Demolition of dwelling

We refer to Taxation Determination TD 1999/79 Income tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to:(a) a voluntary 'loss' or 'destruction'? (b) intangible assets?

This document confirms that a CGT event C1 can happen on the voluntary destruction of an asset where, as in your situation, you demolish a building in the course of redeveloping a property.

Accordingly, when you demolish the existing dwelling CGT event C1 will happen. The timing of this event is when the destruction occurs if no compensation is received. 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.

If no capital proceeds are received for the demolition of the building, the cost base attributed to the dwelling is nil, therefore you will not make a capital gain or capital loss upon the demolition of the original dwelling.

Subdivision

When you subdivide a block of land, each 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 land does not result in a CGT event as long as the ownership of the subdivided blocks does not change. Therefore, you do not make a capital gain or capital loss at the time of subdivision.

The date you acquired your interest in the subdivided blocks is the date you acquired your interest in the original land and the cost base of the original purchase is divided between the subdivided blocks on a reasonable basis.

Cost base

The cost base of a CGT asset is made up five elements. The elements include the amount paid in order to acquire the asset in question, plus most other incidental costs incurred along the way to maintain, preserve or dispose of the asset.

The five elements are:

1. The money paid, or required to be paid, in respect of acquiring the CGT asset, or the market value of any other property given, or required to be given, in respect of acquiring the CGT asset.

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event.  These costs include stamp duty, legal fees, agent's commission, fees paid for professional services.

3. Non-capital costs incurred in connection with ownership, for example, interest, rates, land tax, repairs and insurance premiums (provided that these expenses have not, or could not, have been claimed as a 'deduction', for example, as rental deductions). They also include non-deductible interest on loans used to finance capital expenditure incurred to increase an asset's value.

4. Capital expenditure incurred for the purpose or the expected effect of which is to increase or preserve the asset's value or that relates to installing or moving the asset. For example, extensive renovations undertaken to the CGT asset.

5. Capital expenditure incurred to preserve or defend the title or rights to the asset.

Should a capital loss be made in relation to the sale of the block, the third element is excluded from the cost base. The resulting cost base is known as a reduced cost base.

When land is subdivided, the cost base of the original asset is apportioned between the newly-created assets.

We refer to Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?

This TD explains that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks. 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. For example, if one block has an uninterrupted ocean view it may be worth more than the other block that does not.

The costs of subdivision should also 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 construction and costs of connecting electricity and water to the block should be attributed solely to that block).

Where you are constructing a new main residence on one of the newly-created blocks, all the costs associated with that construction will be wholly attributable to that block.

Costs of demolition

Section 110-25(5) states

The fourth element is capital expenditure you incurred:

(a) the purpose or the expected effect of which is to increase or preserve the asset's value; or

(b)  that relates to installing or moving the asset.

You intend to demolish your existing residence to make way for the subdivision of your land into two separate blocks. One will be your main residence and the other will be sold. You will be increasing the original value of your asset from one property to two separate properties. Accordingly you will be entitled to include the apportioned costs of demolition in the fourth element of the cost bases of each block.

Disposal of the subdivided vacant lot

CGT event A1 will occur upon the disposal of the block that you do not intend to make your main residence. You will make a capital gain if your capital proceeds are greater than your cost base, for example, if you receive more for an asset than you paid for it. You make a capital loss if your capital proceeds are less than your reduced cost base.

The cost base for this block will be calculated using the five elements outlined above and will include:

• an apportionment of the cost base of your original property when originally acquired calculated on a 'reasonable basis', plus an apportionment of the costs of demolition; plus

• an apportionment of the costs of subdividing the blocks, plus

• any costs that are attributable solely to that block.

The discount method can be used to calculate your capital gain if:

• you are an individual (not a company or a trust)

• a CGT event happens to an asset you own

• the CGT event happened after 21 September 1999

• you acquired the asset at least 12 months before the CGT event, and

• you did not choose to use the indexation method.

The discount percentage is 50% for individuals.

You are entitled to use the discount method in calculating your capital gain or loss on the sale of the block as more than 12 months have elapsed since the purchase of the original property.

Note: When a property has more than one owner, the net capital gain is to be distributed according to each owner's individual ownership interests. For example joint tenants split the net capital gain 50/50.

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