Edited version of private advice

Authorisation Number: 1052115732704

Date of advice: 5 May 2023

Ruling

Subject: CGT and subdivision

Question

Will you be subject to Capital Gains Tax under section 104-10 of the Income Tax Assessment Act 1997 on the sale of the subdivided lots of your property?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 19XX

Relevant facts and circumstances

You purchased a property before 20 September 1985 which is X hectares in size.

You lived on the land in a demountable cottage.

You will arrange for demolition of the dwelling in order to subdivide the land.

You have engaged town planning consultants and submitted an application to the planning department to have the block subdivided into X hectare blocks.

You have also engaged a real estate agent to sell the lots once the subdivision process is finished.

You have stated you intend to retain Block X, and sell Block X and X as bare, undeveloped and improved land.

You previously applied for a private ruling on the question of whether there would be any GST implications on the disposal of Block X and X. It was determined that no GST will be payable because you are not conducting a business nor an enterprise.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 102-22

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Subsection 104-20(3)

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 subsection 112-25(2)

Reasons for decision

Demolition

Section 104-20 of the Income Tax Assessment Act 1997 states that CGT event C1 occurs if a CGT asset you own is lost or destroyed.

Subsection 104-20(3) of the ITAA 1997 states that you will make a capital gain if the capital proceeds from the loss or destruction of the asset are more than its cost base, and similarly, you make a capital loss if those capital proceeds are less than the assets reduced cost base.

Section 102-22 of the ITAA 1997 provides that a capital gain or loss is generally made when there is a difference between two amounts used in the calculation of the disposal of a capital asset.

Subdivision

Section 112-25 of the ITAA 1997 provides that the splitting of a CGT asset into 2 or more assets is not a CGT event. It also states that the elements of the original assets cost base should be used to determine the new assets cost base, apportioning those elements where required.

Taxation Determination TD 7:Capital Gains: What are the consequences of sub-dividing pre-CGT land? states that when Pre-CGT land is subdivided after 19 September 1985 the land will maintain its pre CGT acquisition date because no CGT event has happened.

Sale of the lots

Paragraph 104-10(5)(a) of the ITAA 1997, a capital gain from the disposal of a pre-CGT asset is disregarded.As mentioned above, when a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event as there is no change in ownership (subsection 112-25(2) of the ITAA 1997) and therefore pre-CGT land that is subdivided after 20 September 1985 will retain its pre-CGT status until disposal.

Application to your circumstances

The demolition of your dwelling is a CGT event under section 104-209 of the Income Tax Assessment Act 1997. However, you will not make a capital gain or capital loss from the demolition. This is because even though the demolition is a CGT event, your capital proceeds from the demolition and the cost base of the dwelling are both nil.

When you subdivide your property, this will not be a CGT event as the subdivision does not change the ownership of the subdivided blocks. Therefore, a capital gain or loss is not made at the time of the subdivision and you are taken to have acquired the subdivided blocks on the date you acquired the original house and land.

As you are taken to have acquired the subdivided blocks on the date you acquired the land, which was before 20 September 1985, there would be no CGT payable on the sale of the remaining blocks as per paragraph 104-10(5)(a) of the ITAA 1997, a capital gain from the disposal of a pre-CGT asset is disregarded.

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