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Edited version of private ruling
Authorisation Number: 1011492605349
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Ruling
Subject: Capital gains tax- subdivision, demolition, construction and disposal.
Question:
Does the cost base of your dwelling include the market value of the subdivided land at the time of sale?
Answer:
No.
This ruling applies for the following period:
Year ended 30 June 2009
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You purchased a dwelling (Dwelling A) sometime after 20 September 1985 and occupied it as your main residence.
You purchased another dwelling (Dwelling B).
You intended on subdividing the land under Dwelling B but developed Dwelling A instead, residing in Dwelling B during construction.
You rented out Dwelling A.
Dwelling A remained tenanted until just before you began the development.
Construction began and was completed.
The existing dwelling was demolished and units were constructed. You did not receive any money as a result of the demolition.
You occupied unit 1 as your main residence.
Unit 2 was rented out.
The property was subdivided on at some point after this occurred.
Unit 2 was sold.
At the start of the redevelopment, the bank provided you with a valuation for the land.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 102-20,
Income Tax Assessment Act 1997 section 104-10,
Income Tax Assessment Act 1997 section 104-20,
Income Tax Assessment Act 1997 section 112-25 and
Income Tax Assessment Act 1997 section 112-30.
Reasons for decision
Detailed reasoning
You make a capital gain or capital loss if a capital gains tax (CGT) event happens.
Subdivision is not a CGT event in itself. If you subdivide a block of land, each block that results from the subdivision will be registered with a separate title. For CGT purposes, the original asset has been divided into new separate assets.
However, you make a capital gain or capital loss when you sell the subdivided blocks. The date that you acquired the subdivided blocks is the date that you acquired the original block. To work out the cost base of the new subdivided blocks, you work out each element of the cost base and reduced cost base of the original asset (block of land) at the time it was subdivided, and then apportion these costs between the subdivided blocks on a reasonable basis.
The Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks that is appropriate in the circumstances of the particular case, i.e. on an area basis or relative market value basis.
If you do not receive consideration from the demolition of the original dwelling, the original purchase price of the property becomes the cost of the land only.
In a situation where you demolish an existing dwelling and subdivide land into two blocks, demolition expenses, survey, legal fees and application fees associated with the subdivision should also be apportioned over the two blocks. Costs which relate solely to a particular block should not be apportioned. The costs of connecting electricity and water, to an individual block that is to be sold, may be attributed solely to that block.
The cost base would also include the cost of constructing the new dwelling on that block.
In your situation, as you did not receive any proceeds for the demolition of the original dwelling, the original purchase price of the property will now be the cost of the land only. When you subdivided the land into two new blocks, each block became a new CGT asset. You will need to apportion the cost base of the original block at the time it was subdivided between the two new blocks. The costs associated with the subdivision should be apportioned across the two blocks, with costs that relate directly to Unit 2, being attributed solely to that block. The cost base for Unit 2 will also include the costs of construction of the new dwelling.