Edited version of private ruling

Authorisation Number: 1011638270466

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Ruling

Subject: Capital gains tax (CGT) - main residence - subdivision - demolition of dwelling - disposal of subdivided blocks of land

Is any capital gain or capital loss made on the disposal of the subdivided blocks of land disregarded?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your spouse jointly purchased land with an existing dwelling located on it after 20 September 1985. The area size of the land was X square metres.

The dwelling is the main residence of you and your spouse.

You intend subdividing the land and demolishing the existing dwelling.

You will not receive any proceeds for the demolition of the dwelling.

You will dispose of the subdivided blocks of 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

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-160

Income Tax Assessment Act 1997 Section 118-165

Reasons for decision

Subdivision

You may make a capital gain or capital loss when a CGT event happens to a CGT asset. The most common CGT event, CGT event A1, occurs when your ownership interest in a CGT asset is transferred to another entity.

Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. For CGT purposes, the original land parcel is divided into two or more separate assets. The acquisition date of those blocks will be the same as the original block.

In your case, you intend subdividing your land into a number of blocks of land. As a CGT event does not occur when subdivision occurs, you do not make a capital gain or capital loss at the time of subdivision. However CGT event A1 will happen when you sell the subdivided blocks.

Demolition of Dwelling

CGT event C1 occurs if a CGT asset you own is lost or destroyed, such as on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property.

Where no proceeds are received for the demolished dwelling, the original cost base of the land and dwelling is wholly attributable to the land. As the cost base and capital proceeds in respect of the demolished dwelling is nil, you will not make a capital gain or a capital loss due to the demolition of the dwelling.

Main residence CGT exemption

Generally, 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 individual's main residence for the entire period it was owned.

However, where you demolish a dwelling and do not build a replacement dwelling on the land, but instead sell the property as vacant land, the main residence exemption is lost as the exemption attaches to the dwelling and not the land.

In your case, you will demolish the existing dwelling, your main residence, and will dispose of the vacant blocks of land. Therefore, you are not entitled to the main residence exemption on any capital gain made on the disposal of the land as no dwelling will exist at the time of disposal of the subdivided blocks of land.

Cost base

The dwelling and land are not separate CGT assets and the demolition of the dwelling will happen to only part of your asset. Normally when a CGT event has happened to only part of the asset, you are required to apportion the cost base or reduced cost base between the land and the dwelling. But in the case that no capital proceeds are received for the demolition, no amount is apportioned to the cost base or reduced cost base of the dwelling. Therefore, upon demolition of the dwelling the original cost base of the land and dwelling is wholly attributable to the land.

CGT event A1 will occur when you dispose of the subdivided blocks of land. The disposal of each subdivided block is treated as the disposal of an asset in its own right, and not as a disposal of part of an asset. When the land is subdivided the cost base of the original land and dwelling should be apportioned on a reasonable basis between the two subdivided blocks.

A reasonable apportionment of the original cost of the land 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. If the blocks are of unequal market value the costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks.

Note: There are no CGT provisions or legislation that would allow the market value of the land prior to the subdivision to be used as the cost base of the subdivided blocks of land.