Edited version of private advice

Authorisation Number: 1051807856192

Date of advice: 11 March 2021

Ruling

Subject: CGT - disposal

Question

Will you have a capital gain on the disposal of the two allotments?

Answer 1

Yes

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You jointly purchased a property (Property A) many years ago. The dwelling on Property A was built across two allotments - allotment A and allotment B. Each allotment was on a separate title. The purchase priceforProperty A including the dwelling was $XXX,000.

The Property was purchased as equal tenants-in-common. The dwelling was always the main residence of two of the owners and was never used to produce income.

In 20XX, you jointly purchased an apartment off-the-plan (Property B). You purchased Property B as tenants-in-common in equal shares. Property B was due for completion in 20XX but was not completed until 20XX.

Shortly afterwards, one of the owners was suffering from serious ailments and worsening signs of a neurological condition. They were admitted to an aged care facility and remain there.

Your other parent moved out of the dwelling on Property A shortly before it was demolished.

The dwelling on Property A was demolishedpriorto disposal.

Settlement for one Allotment was finalised shortly afterward. It was sold for $XXX,000.

Settlement for the other Allotment was finalised soon after. It was sold for $XXX,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 subsection 108-55(1)

Income Tax Assessment Act 1997 subsection 112-30(2)

Income Tax Assessment Act 1997 subsection 112-30(3)

Income Tax Assessment Act 1997 subdivision 118-B

Income Tax Assessment Act 1997 subsection 118-110(1)

Reasons for decision

Summary

As there was no dwelling on the allotments at the time of their disposal, you cannot disregard any capital gains made on their disposal. You must therefore calculate your capital gain in accordance with your ownership interest.

Detailed reasoning

Capital gains tax (CGT) event C1 happened on demolition of the dwelling. CGT event C1 happens when you demolish a CGT asset, in this instance the dwelling on Property A and Property B. The time of the event is when you receive compensation. If no compensation is received, the time of the event is when the destruction occurs.

You make a capital gain if the capital proceeds received are greater than the cost base. You make a capital loss if the capital proceeds are less than the cost base. In this instance, you did not receive any compensation or capital proceeds for the demolition of the dwelling on Property A.

The effect of the cost base rules in subsections 112-30(2) and 112-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997) is that no capital gains or capital losses arise when CGT event C1 happens on the demolition of a dwelling if no capital proceeds are received for it.

In accordance with subsection 112-30(2) of the ITAA 1997, the cost base of a CGT asset is apportioned if a CGT event happens to some part of the asset but not the remainder of it. The general rule is that what is attached to the land is part of the land. In this instance, the dwelling is not considered a separate asset to the land. Therefore, the dwelling that was demolished is considered to be part of the land. Because you received no capital proceeds, no amount is apportioned to the dwelling.

Main residence exemption

To be eligible for the main residence exemption, there must be a dwelling on the land which was your main residence during your ownership interest. In your case, the dwelling was demolished prior to sale. As the main residence exemption does not apply to vacant land, the main residence exemption under Subdivision 118-B of the ITAA 1997 is not available.

As there was no dwelling on the land at the time of disposal, you have disposed of two CGT assets - each Allotment which are vacant land. As they were purchased after 20 September 1985, they are post CGT assets. This means that you will need to work out your capital proceeds and cost base to calculate your capital gain. As you each have a one-third interest in both allotments, you should work out your capital gain based on one-third of the proceeds for each CGT asset.

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