Edited version of private ruling

Authorisation Number: 1011573210795

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Ruling

Subject: capital gains tax - main residence/subdivision of land.

Question

Will capital gains tax be applicable upon disposal of your vacant block of subdivided land?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You and your spouse purchased a property not exceeding 2 hectares after 20 September 1985 with settlement occurring in the same year. The property was purchased as joint owners.

The property consists of land and a house that is your main residence.

You and your spouse intend to subdivide the property and sell approximately one sixth as a vacant block of land.

You and your spouse have not undertaken any previous property development activities for profit-making purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-3

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 112-25(1)

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

Income Tax Assessment Act 1997 Subsection 112-25(3)

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997-Section 115-25

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-165

Reasons for decision

Capital Gains Tax

You make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Any assessable capital gain realised is included in your tax return, along with your other income, which is taxed at your marginal tax rate.

You dispose of an asset when a change of ownership interest occurs from you to another entity. The time of the event is when you enter into the contract of sale, or if there is no contract when the change of ownership occurs. Section 104-10 of the ITAA 1997 provides that the disposal of a CGT asset such as property will result in a CGT event A1 to occur.

You make a capital gain if your capital proceeds are greater than your cost base, for example, if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base is greater than your capital proceeds.

When working out if you have made a capital gain or a capital loss you must first establish the cost base of the asset. This is then subtracted from the capital proceeds to work out the capital gain or capital loss.

The following elements are considered when working out the cost base for an asset.

Money or property given for the asset

Incidental costs of acquiring the CGT asset or that relate to the CGT event

Costs of owning the asset

Capital costs to increase or preserve the value of your asset or to install or move it

Capital costs of preserving or defending your ownership of or rights to your asset.

You need to work out the amount for each element above, and then add them together to work out the cost base of your CGT asset.

When a CGT event happens to a CGT asset and you haven't made a capital gain, you need to calculate the asset's reduced cost base to work out whether you have made a capital loss. The reduced cost base of a CGT asset has the same five elements as above, except for the third element where the costs of owning the asset are replaced by a balancing adjustment. The balancing adjustment relates to depreciating assets.

Discount method

In certain circumstances, you may be eligible to reduce the amount of tax payable on a capital gain. The CGT discount allows individuals to pay tax on only half of any capital gain they make on assets owned for at least 12 months.

To meet the eligibility criteria for the discount you must:

· be an individual

· have held the asset for longer than 12 months

· have disposed of the asset after 11:45am ACT legal time on

· 21 September 1999; and

· did not choose to use the indexation method.

How to work out your capital gain or capital loss

Work out your capital proceeds from the CGT event.

Work out the cost base for the CGT asset.

Subtract the cost base from the capital proceeds.

If the proceeds exceed the cost base, the difference is your capital gain.

If the proceeds do not exceed the cost base, work out the reduced cost base for the asset.

If the reduced cost base exceeds the capital proceeds, the difference is your capital loss.

If the capital proceeds are less than the cost base but more than the Reduced cost base, you have neither a capital gain nor a capital loss.

Subdivision of land

A subdivision of land is not a CGT event. If you subdivide a block of land, each separate block is registered under a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets.

Subdividing the land does not in itself change the ownership of the subdivided blocks, however a CGT event will happen when you sell the subdivided land. The acquisition date of the subdivided block is the same acquisition date as the original parcel of land.

Main residence

A capital gain or capital loss an individual makes from a CGT event that happens to a dwelling is disregarded if the dwelling was the taxpayer's main residence throughout the period it was owned.

The main residence exemption can apply to up to 2 hectares of land adjacent to a dwelling if the land was used primarily for private or domestic purposes in association with the dwelling.

However, section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to a CGT event that happens in relation to land, to which the exemption can extend under section 118-120 of the ITAA 1997 if that CGT event does not also happen to the dwelling.

Cost base of subdivided land

Where land is subdivided, the original cost base of the land needs to be apportioned between the new assets on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the blocks. A copy of TD 97/3 has been enclosed for your convenience.

A reasonable apportionment of the original cost of the land in itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case. Taxation Determination TD 10 provides that where the 'market value' of an asset needs to be determined, taxpayers can choose to:

· obtain a detailed valuation from a qualified valuer; or,

· compute their own valuation based on reasonably objective and supportable data.

The actual 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 relative market values of the blocks. However, any cost solely related to one block, such as connection of water or electricity, should be attributed solely to the cost of that block.

Application to your circumstances

In your case, you purchased a property after 20 September 1985 and live in a dwelling situated on the property which is your main residence. You intend to subdivide the property and sell a vacant block of land. By subdividing a block of land from your main residence, you will create a new asset. The acquisition date of the subdivided block will be the date you purchased the original property.

As you intend to subdivide and sell a portion of land which does not include your main residence, the main residence exemption will not apply to disregard any realised capital gain upon sale.

Further, the eventual sale of the subdivided block will trigger a CGT event and any capital gain you make on disposal of the vacant block of subdivided land will be subject to CGT.

To calculate the capital gain, you must first determine the cost base of the subdivided block.

You will need to calculate the amount for each element, then add them together to work out the cost base of the subdivided block.

The costs attributable to each element are as follows:

· the first element of the cost base would include a reasonable proportion of the original purchase cost of the original property.

· the second element of the cost base would include the legal and surveyor costs relating to the subdivision.

· the third element of the cost base would include interest on any loans and rates, and

· the fourth element of the cost base of the subdivided block will include the council costs and any capital costs you incurred that relate to installing the asset, such as sewerage cost, fencing to divide the properties (50% of the fence cost), landscaping or clearing the block of land, gas and plumbing expenses.

As you will have ownership of the land for more than 12 months, you can apply the 50% discount to effectively half the amount of any capital gain which is subject to CGT.