Edited version of private ruling

Authorisation Number: 1011474794352

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Ruling

Subject: Capital gains tax - Main residence - subdivision and disposal

Question:

Is the capital gain or capital loss disregarded on the disposal of your property constructed four years after the existing dwelling was demolished?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

In early 2000's you and your spouse exchanged contracts to purchase a property (property C).

Settlement occurred a month later.

The land attached to the dwelling does not exceed two hectares.

You and your spouse established property C as your main residence for a period of more than four years.

At the same time you and your spouse obtained a construction certificate for a property.

The original dwelling was demolished.

For the period of approximately six months the vacant land was on the property market.

Shortly after construction commenced on the properties as you and your spouse were not able to dispose of the vacant land.

The following year you and your spouse purchased another property (property B).

You and your spouse did not move into property B nor did you rent or deprive any income from this property.

You and your spouse renovated property B over a period in excess of two years.

During this period you and your spouse resided with relatives.

Two years after construction commenced property C and property B were placed on the property market.

Two months later property C and property B were disposed of to two separate individuals.

The following month an occupancy certificate was issued for the property.

One of the properties was occupied shortly after the occupancy certificate was issued.

You and your spouse have never resided in either property C or property B.

Settlement took place on both property C and property B some years ago.

A year later you and your spouse moved into property B.

You and your spouse have provided copies of the following documentation to support your application and these documents are to be read with and form part of the scheme for the purpose of this ruling:

· letter from your solicitor - purchase of property C

· Construction Certificate

· Sales Inspection Report and Exclusive Agency Agreement form - property C

· Sales Inspection Report and Auction Agency Agreement - (property C)

· Sales Inspection Report and Auction Agency Agreement - (property B)

· Occupation Certificate

· letter from your solicitor - property C, and

· letter from your solicitor - property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 104-20.

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-150

Reasons for decision

The most common CGT event, (CGT event A1) happens if an individual disposes of a CGT asset to another entity. The time of the event is when the contract for the disposal is entered into, or if there is no contract, when the change of ownership occurs.

A CGT event A1 occurred when you and your spouse disposed of the properties.

Subdivision of land 

The subdivision of land itself does not constitute a CGT event. Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets.

Therefore, the subdivided blocks will retain the acquisition date of the original property.

The cost base of the original property will be apportioned between the subdivided blocks on a reasonable basis.

Taxation Determination TD 97/3 (enclosed) provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks (that is, on an area basis or relative market value basis).

A reasonable apportionment of the original cost of the land itself can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case.

Subdivision costs

The costs of subdivision should also be apportioned between the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as surveying, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market values of the two blocks.

However, any cost solely related to one block should be attributed solely to that block.

Construction, renovating or repairing a dwelling on land you already own

Generally, if you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling becomes your main residence. However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence in certain circumstances.

You can choose to have this exemption apply if you acquire an ownership interest in land and you:

· build a dwelling on the land

· repair or renovate an existing dwelling on the land, or

· finish a partly constructed dwelling on the land.

There are conditions that you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then:

· move into the dwelling as soon as practicable after it is finished, and

· continue to use the dwelling as your main residence for at least three months after it becomes your main residence.

If a newly constructed dwelling is built to replace a previous dwelling that was demolished or destroyed, you can get a full exemption when you dispose of the property if:

· the original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income, and it was on land covering an area of two hectares or less

· the new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it, and that period is at least three months

· you make a choice to treat the vacant land and new dwelling as your main residence in the period starting when you stopped occupying the previous dwelling and ending when the new dwelling becomes your main residence, and this period is four years or less, and

· you dispose of the land and new dwelling together.

However, if you do not qualify for a full main residence exemption you maybe eligible for a partial main residence exemption.

How this applies to your situation

You and your spouse are not entitled to a partial or full main residence exemption on the disposal of the properties as you do not meet any of the above conditions.

You and your spouse can use the discount method to calculate your capital gain as you meet all the necessary criterion.

For more information on how to calculate your capital gain please see the enclosed information sheet. This information has been taken from the Guide to capital gains tax 2008-09 (NAT 4151-6.2009), information is also available on our website.