Edited version of private advice

Authorisation Number: 1051690595028

Date of advice: 29 May 2020

Ruling

Subject: Capital gains tax - subdivision - cost base

Goods and Services tax - taxable supply

Question 1:

Is the activity of demolishing the existing house and the subdivision considered to be a profit-making undertaking?

Answer:

No. Based on the information provided it is not viewed that the subdivision activities are a profit-making undertaking in accordance with Taxation Ruling TR 92/3.

Therefore, the proceeds from the gifting of the subdivided lots will be assessable under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2:

Will the capital proceeds you receive from the gifting of the subdivided lots be their market value in accordance with subsection 116-30(1) of the ITAA 1997?

Answer:

Yes. You will gift the subdivided lots and will not receive any money. Therefore, for capital gains tax purposes you will be viewed as having received the market value of each subdivided lot as at the date you dispose of your ownership interests in them.

Question 3:

Will the first element of the cost base of the Property be its market value calculated as at the date you acquired your ownership interest in it?

Answer:

Yes. Based on the information provided it is not viewed that you and your relative dealt with each other at arm's length in relation to the transferring of your ownership interests in the respective properties to each other. Therefore, the market value substitution rules contained in paragraph 112-20(1)(c) of the ITAA 1997 will apply and the first element of the cost base of the Property will be its market value on the date the title in the Property was transferred into your name.

Question 4:

Can the costs incurred in relation to the demolition of the house be included in the fourth element of the Land after the house is demolished?

Answer:

Yes. The costs incurred to demolish the house located on the Property can be included in the fourth element of the Land in accordance with subsection 110-25(5) of the ITAA 1997 as they are capital expenditure incurred to remove the house.

Question 5:

Can the costs incurred in relation to the subdivision activities be included in the fourth element of each of the subdivided lots?

Answer:

Yes. The costs incurred in relation to the subdivision of the Land are capital expenditure incurred to increase the value of the Land. Therefore, those costs can be included in the fourth element of each of the subdivided lots in accordance with subsection 110-25(5) of the ITAA 1997.

Question 6:

Are you entitled to apply the 50% CGT discount under Division 115 of the ITAA 1997 to any capital gain made on the gifting of the subdivided lots?

Answer:

Yes. As you meet the conditions contained in Division 115 of the ITAA 1997, you can reduce any capital gain made from the gifting of the two subdivided lots by 50%.

Question 7:

Is Goods and Services Tax (GST) payable on the transfer of the subdivided lots to your children?

Answer:

No. GST is not payable on the transfer of the subdivided lots because you are not making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999.

This ruling applies for the following periods:

Income year ending 30 June 2020

Income year ending 30 June 2021

The scheme commences on:

1 April 2020.

Relevant facts and circumstances

You owned Property A and your relative owned Property B.

You and your relative both transferred your ownership interest in the property you owned to the other, with the title deeds being changed after 20 September 1985 to reflect the change of ownership of the properties. No money was exchanged between you and your relative in relation to the disposal of your respective ownership interests.

As a result of the transfer you acquired full ownership of Property B (the Property) which has been used as a rental property since you acquired it.

You wish to transfer the Property in equal parts to your children and their spouses who will construct a dwelling on their respective portion of the Property. To achieve this the existing house on the Property will be demolished and the remaining land (the Land) will be subdivided into equal lots.

You anticipate transferring your ownership interest in the Land in equal parts to each of your children, and their respective spouses.

You will not receive any sale proceeds on the disposal of your ownership interests in the proposed subdivided lots.

Apart from leasing the Property, you also provide cleaning services. However, you are not registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 section 9-20.

A New Tax System (Goods and Services Tax) Act 1999 section 9-40.

A New Tax System (Goods and Services Tax) Act 1999 section 23-5.

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