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Edited version of private ruling
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Ruling
Subject: Capital gains tax - Partial demolition of main residence and cost base
Question: Are the costs you will incur to your main residence upon its partial demolition and
re-construction included in the cost base of the newly subdivided block?
Answer: No.
This ruling applies for the following period
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts
In 1993 you and your spouse jointly acquired a dwelling (the dwelling).
You and your spouse moved in as soon as practicable and established the dwelling as your main residence.
The total are of the block is more than 1,000 square metres.
The block has been re-zoned which will now allow you and your spouse to subdivide the land.
The dwelling on the block covers the full frontage of the land.
To enable the subdivision to proceed you and your spouse will be required to partially demolish the existing dwelling.
The garage, kitchen and laundry will be required to be demolished and relocated on the adjoining site. The dwelling will remain your main residence.
The capital works required by the council in order to approve the subdivision and retention of your main residence estimated to cost $X.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 112-25
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 104-20
Reasons for decision
Subdivision of land
The subdivision of land itself does not constitute a capital gains tax (CGT) event. Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets.
Therefore, the subdivided blocks will retain the acquisition date of the original property.
The cost base of the original property will need be apportioned between the subdivided blocks on a reasonable basis.
Taxation Determination TD 97/3 (enclosed) provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks (that is, on an area basis or relative market value basis).
A reasonable apportionment of the original cost of the land itself 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.
Subdivision costs
The 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 the relative market values of the two blocks. However, any cost solely related to one block should be attributed solely to that block.
Please note - The costs of the demolition of a portion of the dwelling are solely attributable to the block of land containing the dwelling. Therefore, they do not form part of the cost base of the vacant block of land.
Therefore, the capital works costs associated with the demolition and re-instatement of services and facilities to the dwelling cannot be included in the cost base of the newly subdivided block of land, as they relate solely to the block with the dwelling.