Edited version of private ruling

Authorisation Number: 1011682178046

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Ruling

Subject: Capital gains tax

Question

Are you liable under the capital gains tax provisions if you are forced to sell the vacant unit?

Answer: 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 as joint tenants after 20 September 1985.

The size of the parcel of land was not greater than 2 hectares.

You and your spouse lived in the property for some years before you subdivided it to build two freestanding houses.

The two subdivided parcels of land are fairly equal in size; the rear block is slightly larger.

The original dwelling that was on the property when you purchased it was removed to enable space for the two new dwellings. You gave it away for no consideration.

The plans for the subdivision are currently in the approval process.

Your intention was to live in the rear house and sell the other.

You constructed the rear house and commenced living in it as soon as practicable.

You commenced constructing the front house shortly after and it was completed in the 2010-11 income year.

Your spouse passed away before the front house was completed.

The front house has remained vacant and you have never lived in it.

Neither of the dwellings nor the land has ever been used to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-55

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Capital gains tax

You can make a capital gain or capital loss whenever a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is referred to as CGT event A1 which happens whenever you dispose of your ownership interest in a CGT asset, such as property, to someone else. This will take place when you sell the vacant unit.

Capital gains tax is not a separate tax. Any assessable capital gain you make during the year is included in your tax return, along with your other income, and you are taxed at your marginal tax rate.

Subdivision of land

When you subdivide a block of land, each new block is registered with a separate title. When you sell or dispose of one of those subdivided blocks it is therefore treated as the disposal of a CGT asset in its own right, and not as a disposal of part of the original land parcel. Taxation Determination TD 97/3 states that you are taken to have purchased or acquired each of the subdivided blocks of land when the original land parcel was acquired.

Separate Asset

A building or structure on land that you acquired on or after 20 September 1985 is taken to be a separate CGT asset from the land if one of the balancing adjustment provisions applies.

Based on the facts provided the dwelling you constructed on the front block is not covered by the balancing adjustment provisions, nor was the land acquired prior to 20 September 1985, therefore the front unit will not be treated as a separate asset.

In your circumstances, as the front unit is not a separate asset from the land, the unit is taken to have been acquired at the time of the land.

When you dispose of the front block with the unit, a CGT event A1 will occur and you will be subject to the capital gains tax provisions.

Main residence exemption

If a CGT event happens to a dwelling that is your main residence, you can ignore any capital gain or capital loss made from that event. However, to be eligible for the full main residence exemption, there are several factors which must be satisfied.

For the main residence exemption to apply, the dwelling must have qualified as your main residence throughout your ownership period. The ownership period is the period when you had an ownership interest in the dwelling, or the land on which it is built. Your ownership interest in a dwelling or land begins and ends on settlement of the respective contracts of sale.

As the front unit was a newly constructed dwelling on a block that you subdivided from your original property, you must have moved into the new dwelling as soon as practicable after the building was completed.

Taxation Determination TD 92/147 explains how we determine whether a dwelling is erected or completed and sets out the following factors to assist in that determination:

· the date the Certificate of Occupancy is issued;

· the date final building inspection approval is given;

· the date the dwelling becomes structurally complete; and

· the connection of services, for example, electricity and gas.

In addition, the full main residence exemption only applies in cases where:

· the dwelling was your home for the whole period you owned it;

· you did not use the dwelling to produce assessable income; and

· the land on which the dwelling is situated is 2 hectares or less.

The publication entitled Guide to capital gains tax 2009/10 (NAT 4151 available at: www.ato.gov.au/individuals/content.asp?doc=/content/36883.htm), outlines the factors which are relevant in working out whether a dwelling is your main residence. One of these factors states that there is no minimum time you have to live in a home before it is considered to be your main residence.

From the information you have provided it is clear that the front unit has never been your main residence and even if you decide to move in to it now, it would not be eligible for a full main residence exemption when you sell or dispose of it, as you did not move in as soon as practicable after completion.

Partial main residence exemption

In the event that you do move into the front unit and establish it as your main residence, you may be eligible for a partial main residence exemption when and if you decide to sell it. In this case to calculate your capital gain or capital loss on the unit the following formula must be used:

Capital gain or capital loss amount

multiplied by non main residence days

divided by total days.

Where:

Capital gain (or capital loss) is the capital gain or loss you would have made from the CGT event if the main residence exemption had not applied.

Non-main residence days is the number of days in your ownership period when the unit was not your main residence. This will be calculated by adding the number of days from settlement of purchasing the original property up until the date you actually move into the unit and make it your home.

Days in ownership period is the total number of days that you owned the dwelling from the date of settlement of the original purchase and the date of settlement for its disposal.

Discount capital gain

To be eligible to use the 50% discount capital gain method:

· you must be an individual, a trust or a complying superannuation entity;

· you must have had a CGT event happen to an asset you own;

· the CGT event must have happened after 11.45am (by legal time in the ACT) on 21 September 1999;

· you must have acquired the asset at least 12 months before the CGT event,

· you must not have chosen to use the indexation method.

As you satisfy all the above criteria, you are able to apply the discount capital gain method when calculating your net capital gain.

Under the discount capital gain method you reduce your capital gain by the discount percentage, which is 50% for individuals. However, you can only reduce the capital gain after you have applied any capital losses for the year and any unapplied net capital losses from earlier years.