Edited version of private advice

Authorisation Number: 1052031359656

Date of advice: 23 September 2022

Ruling

Subject: CGT - disposal of vacant land

Question 1

Is any capital gain or capital loss you make on the sale of your pre-CGT interest in the vacant land disregarded?

Answer

Yes. Any capital gain or capital loss you make on your pre-CGT interest in the vacant land is disregarded for capital gains purposes.

Question 2

Is any capital gain or capital loss you make on the sale of your post-CGT interest in the vacant land disregarded?

Answer

No. If you make a capital gain on your post-CGT interest in the land any net capital gain or net capital loss must be reported for the relevant income year.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

21 October 20XX

Relevant facts and circumstances

In XXXX you purchased a block of vacant land on a single title for $XXXX.

The vacant land spans over XX hectares.

On XXXX you transferred a half interest in the land to your parent, as one undivided moiety i.e., you became joint tenants. Your parent paid $XXXX for the 50% share. As the property was initially purchased prior to 20 September 1985, the remaining 50% retained by yourself would be considered the pre-CGT component of the asset.

On XXXX, your parent transferred the half interest in the property back to yourself. You paid your father $XXXX for the 50% share. As this transaction took place after 20 September 1985, this 50% share will represent the post-CGT component of the asset.

The vacant land was sold on XXXX and settlement took place on XXXX.

The land was sold for $XXXX.

$XXXX was withheld at settlement by mutual agreement, as repair work on a water supply main on the property could not be completed in time. This money was returned to the purchaser, reducing the sale price to $XXXX.

The land was used only for my own personal recreational activities

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

Reasons for decision

A capital gain or capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). The most common CGT event is CGT event A1 and this occurs when an entity disposes of the ownership interest in an asset. The sale of vacant land would be considered to be a CGT event A1 (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

As per Taxation Determination 2000/31 Income tax: capital gains: if you own an interest in a CGT asset and you acquire another interest in that asset, do the interests remain separate CGT assets for capital gains purposes or do they become a single asset?, the interests remain separate CGT assets for capital gains purposes. The interests are separate CGT assets whether the first interest was acquired before 20 September 1985 (a pre-CGT interest) or was acquired on or after 20 September 1985 (a post-CGT interest).

The consequences are that on the occurrence of CGT events affecting the interests (for example CGT event A1 - about disposals of CGT assets - in section 104-10 of the Income Tax Assessment Act 1997):

(a) there is a separate date of acquisition for each interest;

(b) there is a separate cost base for each interest; and

(c) capital proceeds are determined separately for each interest.

Below is an outline of how each component would be treated in terms of capital gains.

Pre-CGT interest

A CGT event A1 that happens to a CGT asset you own is disregarded if you acquired the asset prior to 20 September 1985.

In this instance, 50% of the vacant land was acquired before 20 September 1985, so therefore the capital gain or capital loss from the sale of your land, for this component, can be disregarded.

Post-CGT interest

On disposal of the vacant block, a CGT event A1 will happen.

You may make a capital gain if your capital proceeds are greater than your cost base - for example, if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base is greater than your capital proceeds. Capital proceeds is the term used to describe what you receive or are entitled to receive from the CGT event that is, from the disposal of a vacant block of land. This is usually an amount of money or the value of any property you receive (section 104-10).

Therefore, in your case, your capital proceeds will be 50% of the money you receive on disposal of the vacant block.

Upon disposal of an asset, the cost base is made up of five elements. In you case:

1. The first element will be 50% of the market value of the vacant land at the time of the transfer from XXXX to yourself on XXXX.

2. The second element will include 50% of the incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.

3. The third element will consist of 50% of any non-capital costs incurred in connection with your ownership of the CGT asset. Examples are interest, rates, repairs and insurance premiums.

4. The fourth element will include 50% of any capital expenditure incurred to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5. The fifth element will include 50% of any capital expenditure to preserve or defend your title or rights to the asset (section 110-25).

As the asset has been owned for more than 12 months, and it was acquired prior to 19 September 1999, you can choose either the indexation method or CGT discount method to calculate your net capital gain for this component.

Therefore, you cannot disregard any capital gain or loss made on the disposal of this component of the vacant block.

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