Edited version of private ruling

Authorisation Number: 1011513123117

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Ruling

Subject: Capital gains tax

Question and answer:

Are you required to pay capital gains tax on the sale of a property which is not your main residence?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You purchased a block of land.

You intend to sub-divide the land.

You intend to build a unit on each block.

You will live in one unit and sell another.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(3).

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 112-25.

Income Tax Assessment Act 1997 Subsection 114-10(1).

Income Tax Assessment Act 1997 Division 115.

Reasons for decision

Subdivision

If a taxpayer subdivides a block of land, each block that results 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 (section 112-25 of the ITAA 1997) Therefore, the taxpayer does not make a capital gain or capital loss at the time of subdivision.

Sale of the property

The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.

You make a capital gain if your capital proceeds exceed the cost base of the asset. You make a capital loss if the reduced cost base of the asset was higher than your capital proceeds.

In your case, you will be subject to CGT when you sell the second unit. You may be entitled to use the discount method of calculation.

Discount method

Division 115 of the ITAA 1997 will allow you to use the discount method to calculate your capital gain if:

- a CGT event happens to an asset you own

- the CGT event happened after 11.45am (by legal time in the Australian Capital Territory) on 21 September 1999

- you acquired the asset at least 12 months before the CGT event and

- you did not choose the indexation method.

The current discount percentage (the percentage by which you reduce your capital gain) for individuals is 50%.

Cost base

Section 110-25 of the ITAA 1997 sets out the five elements that make up the cost base of an asset for CGT purposes. These elements are:

- first element: money or property given for the asset

- second element: incidental costs of acquiring the CGT asset or of the CGT event

- third element: costs of owning the asset

- fourth element: capital costs to increase or preserve the value of your asset or to install or move it and

- fifth element: capital costs of preserving or defending your ownership of or rights to your asset.

Note: the reduced cost base consists of all of the above elements except the 3rd.

For more information on CGT, please refer to the Guide to capital gains tax 2009-10 which is available on our website www.ato.gov.au.