Edited version of private ruling

Authorisation Number: 1011620053428

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Ruling

Subject: Capital gains tax (CGT) - Acquisition and disposal of property

Will the capital gain or capital loss made on the disposal of your property be disregarded?

No.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Sometime before 20 September 1985, your family purchased a property consisting of two dwellings (dwelling A and dwelling B) on one block of land.

The property was purchased in the names of your parents and was adjacent to your family home.

The property was not subdivided.

Occasionally one of your family members lived in one of the dwellings but generally they were both rented out, however the dwellings became run down and were left vacant.

Sometime after 20 September 1985, the ownership of this property was progressively transferred by way of gift to you and your sibling in equal shares.

Dwelling A was renovated and then rented out.

Dwelling B remained empty.

The property has been sold.

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 112-20

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 116-20

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

You make a capital gain or capital loss if a CGT event happens. The most common event occurs if you dispose of a CGT asset, such as your home. This is called CGT event A1.

As the property was gifted to you after 20 September 1985 and was not your main residence for all of your ownership period the capital gain or capital loss made on the disposal of the property is not disregarded.

To work out the capital gain or loss made on the disposal of an asset, it is necessary to compare two amounts and determine the difference between them. These amounts are the capital proceeds and cost base.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Capital proceeds

The capital proceeds are from a CGT event is the total of the money you have received, or are entitled to receive, in respect of the event happening.

The money you received from the sale of the property is the capital proceeds.

Cost base

The cost base of a CGT asset is generally the cost of the asset when you bought it.

The cost base of a CGT asset consists of five elements.

The first element of the cost base, being the acquisition costs, is the total of the money paid, or required to be paid, and the market value of the property given, in respect of the acquisition. 

If you did not incur expenditure to acquire a CGT asset or the amount paid was not equal to the market value of the property, and the parties were not dealing at arms length, generally the market value substitution rules will apply. The rule states that when this occurs, the first element of the cost base or reduced cost base of a CGT asset that is acquired from another entity is its market value at the time of acquisition. 

In your case, your parents progressively transferred the property to you and your sibling as a gift you did not incur any expenditure to acquire it. As such, the market value substitution rule will apply and the first element of the cost base will be determined by the market value of the property when you acquired each interest.

As the ownership interest was transferred to you and your sibling progressively, you will need to determine at each point in time a portion of the ownership interest was transferred to you, the cost base of that portion of the property, determined by its market value at that time.

To determine the cost base of the entire property, simply add up the market value of each portion of the property.

To determine the market value of the portion of the dwelling that was transferred you can choose to:

· obtain a valuation from a qualified valuer, or

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

The second element of the cost base are the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset. Incidental costs can include stamp duty; remuneration for the services of an accountant, agent, valuer, auctioneer; and the costs of advertising to find a buyer. 

The third element is the cost of ownership of an asset. A cost of ownership of an asset is any expenditure in connection with the continuing ownership of the asset. These costs include interest on money borrowed to acquire an asset, costs of maintaining, repairing and insuring an asset, rates and land tax, interest on money borrowed to refinance the money borrowed to acquire an asset, and interest on any money borrowed to finance capital expenditure incurred to increase an assets value.    

The fourth element is capital expenditure incurred to increase the value of the CGT asset. This must be reflected in the enhanced value of the asset at the time of the CGT event.

The fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. 

For more information about the five elements of the cost base, please refer to the Guide to capital gains tax 2009 (NAT 4151) located on the Australian Tax Office's website.

Division of income or loss between co-owners

Any capital gain or loss should be apportioned according to the legal interest of the owners.

The capital gain will be divided between you and your sibling in accordance with your ownership interest in the dwelling, that is, if you have a 50% ownership interest in the dwelling, you will each include 50% of the capital gain in your assessable income when you lodge your income tax returns.

Note:

As you are an individual, your property was be sold after 21 September 1999, you held the property for at least 12 months, and provided you do not calculate your cost base with reference to indexation, any capital gain made on the disposal is a discount capital gain. In your case, you are entitled to reduce the capital gain made on disposal of the property by 50% when working out your net capital gain.