Edited version of private advice

Authorisation Number: 1052364686055

Date of advice: 21 February 2025

Ruling

Subject: CGT - main residence exemption

Question 1

Will you be entitled to the main residence exemption on the disposal of the subdivided block of land?

Answer 1

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have lived at the property for several years and consider the dwelling to be your main residence.

The property contains X parcels of land. The dwelling is located on the parcel of land on the southern side of a creek. The other parcel of land is situated on the opposite side of the creek (the subdivided block of land).

The subdivided block of land was of interest to the owners of the adjoining properties as they would have direct access to the creek.

The subdivided block of land is of no practical use to you, and you have concerns related to the trees and erosion.

You have entered into an agreement with the parties from the adjoining properties outlining that you would be open to transferring the subdivided block of land to them if they cover all expenses related to the transfer.

The amount received from the parties of the adjoining properties is capital proceeds.

The relevant parties have engaged with a surveyor to commence the process.

You do not expect to make a profit from the transfer of the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-165

Does IVA apply to this private ruling?

No.

Reasons for decision

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states the capital gain or loss you make in relation to a capital gains tax (CGT) asset that is a dwelling is disregarded if certain conditions are met. These conditions are that you must be an individual, 'the dwelling was your main residence throughout your ownership period', the dwelling is situated on less than two hectares, and the dwelling did not pass to you through a deceased estate.

Section 118-120 of the ITAA 1997 specifies that the main residence exemption can extend to adjacent land where:

•                     the same CGT event happens to both the land and the dwelling

•                     the land was 'used primarily for private or domestic purposes in association with the dwelling'

•                     the total combined area for the dwelling and adjacent land is less than two hectares.

Section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to the sale of land if the CGT event (the disposal) does not also happen in relation to the dwelling.

Subdivision of land

Section 112-25 of the ITAA 1997 states what happens when you split, change or merge assets, such as subdividing land. If you subdivide a block of land, each block that results is a new asset which is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land. The cost base of the original land is divided between the subdivided blocks on a reasonable basis.

Where subdivided land is sold separately from the dwelling, the main residence exemption will not apply to that land.

Application to your circumstances

You have commenced negotiations to transfer the subdivided block to the associated parties of the neighbouring properties.

The main residence exemption only applies to land containing a dwelling. The transfer of the subdivided block will be subject to capital gains tax as it does not contain the dwelling. Any capital gain that arises on the disposal of the subdivided block will need to be included in your assessable income. Likewise, you would report any capital loss in the income tax return you lodge if that is the result of the disposal.

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