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Edited version of your written advice
Authorisation Number: 1012696857120
Ruling
Subject: Calculating capital gain on the sale of rezoned land
Questions and Answers:
1. Does capital gains tax (CGT) apply to land sold that has been affected by a government directive or rezoning that changes its use and reduces its market value?
Yes.
2. Can the section of your land sold, which was subject to government rezoning, be excluded from your capital gains tax calculations?
No.
3. If the sections of your property can be valued separately, can you calculate your capital gain using the respective market values (at the time of sale) of the rezoned sections?
Yes.
4. Will your capital gains from your property sale be eligible for the 50% discount?
Yes.
5. Are net capital gains taxed at your marginal tax rate?
Yes.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
Prior to 20 September 1985, you purchased land that is greater than 2 hectares in size. Soon after, you constructed the residential dwelling and added other improvements and structures to the land. At all times, your property was used for private and domestic (rather than commercial) purposes.
Recently, a section of your property was incorporated into a government flood management plan, as part of a rezoning. The residential section can be subdivided into smaller blocks however the back section cannot be utilised for residential purposes.
During the year ended 30 June 2014, you sold your property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 10-5
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 118-20
Income Tax Assessment Act 1997 Section 118-30
Reasons for decision
Application of capital gains tax
Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.
Section 118-130 of the ITAA 1997, in relation to a main residence, provides you have an ownership interest in land if you have a legal or equitable interest in it or a right to occupy it.
In your case, although the government rezoned parts of your property, probably reducing its market value, because you continued to own the land, CGT event A1 happened to you when you sold the property. In other words, the section of your land sold, which was rezoned a flood zone, cannot be excluded from your capital gains tax calculations.
Main residence exemption and adjacent land
Subdivision 118-B of the ITAA 1997 disregards a capital gain or capital loss that happens to a dwelling that is a main residence. Section 118-20 therein provides the maximum area of adjacent land covered by the exemption for the CGT event (to the extent that the land was used primarily for private or domestic purposes in association with the dwelling) is 2 hectares, less the area of the land immediately under the dwelling.
Where a taxpayer has land that exceeds 2 hectares, Taxation Determination TD 1999/67 states at paragraphs 3 to 5:
If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land.
If your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis.
The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances.'
It is clear from paragraph 3 of TD 1999/67 that where the value of the selected area of land for the main residence exemption is greater or less than the remainder of the land and both areas can be valued separately, the capital gain or capital loss is calculated by apportioning the capital proceeds and the cost base on the basis of valuation. However, paragraph 5 of TD 1999/67 further provides that the amount attributable must be reasonable in the circumstances.
Taxation Determination TD 97/3 provides the following example:
Jane purchases one hectare of land in 1992. Part of the land is a good quality building block (one-quarter of a hectare) worth 75% of the total market value of the property. The balance of the land is low-lying flood-plain. In 2007, Jane subdivides off the flood-plain. It would be reasonable in the circumstances to apportion 75% of the original acquisition cost of the property to the 'building block' and 25% to the 'flood-plain'.
In your case, although none of your property can be excluded from your capital gains calculation, the capital gains tax you must pay can be determined by the valuation of the various sections of your property sold (i.e., if the different sections can be valued separately).
For example, theoretically, if the residential section of your property is 2 hectares and had a market value of $800,000 and the flood zone section is 1 hectare and has a market value of $100,000, your taxable capital gain would be calculated using capital proceeds of $100,000.
Discount capital gains
For CGT event A1, section 115-25 of the ITAA 1997 provides to be a discount capital gain the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.
Section 115-100 of the ITAA 1997 provides, for an individual taxpayer, the discount percentage is 50%.
In your case, since you acquired your property at least 12 months before the disposal of your property, your capital gain can be reduced by the discount of 50%.
Taxation of net capital gains
Section 6-10 of the ITAA 1997 provides your assessable income includes any amounts (listed in section 10-5) that are statutory income, which includes capital gains calculated under section 102-5. Since capital gains are included in 'assessable income', they are taxed at the same marginal tax rates as all assessable income.
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