Edited version of private ruling

Authorisation Number: 1011694992456

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Ruling

Subject: Income Tax: Capital Gains Tax

Issue 1

Question 1

Is the subdivision of land a Capital Gains Tax (CGT) event under Division 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No.

Question 2

Will the disposal of the subdivided land give rise to any capital gains tax implications under section 104-10 of the ITAA 1997?

Advice/Answers

Yes.

Question 3

If the disposal does give rise to a capital gain, will you be entitled to discount your capital gain under section 115-25 of the ITAA 1997?

Advice/Answers

Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The taxpayer purchased the property in approximately December 1993.

The taxpayer owns the property as an individual taxpayer.

The taxpayer intends to subdivide the property.

The taxpayer has not had any previous involvement in the development or subdivision of land.

The taxpayer has used the property to produce rental income since its purchase in December 2003.

The subdivision of the land has not yet been approved.

The land has not yet been subdivided or sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Division 115-25

Reasons for decision

Issue 1

In summary

Division 104-10 of ITAA 1997 does not include the subdivision of land as a CGT event. However section 112-25 of the ITAA 1997 provides that the splitting or changing of a CGT asset is not a CGT event. Therefore the subdivision of land is not a CGT event and does not change the status of the land provided the taxpayer remains the beneficial owner of the original asset.

When the subdivided land is sold, a CGT event A1 occurs and if the capital proceeds exceed the cost base, the excess is your capital gain from the event. If the capital losses exceed the cost base the excess is your loss from the event.

If the conditions in section 115-25 of the ITAA 1997 are met the taxpayer will be entitled to discount their capital gain.

Question 1

Is the subdivision of land a CGT event under Division 104-10 of the ITAA 1997?

Detailed reasoning

Land is a CGT asset under subsection 100-25(2) of the ITAA 1997.

Division 104-10 of the ITAA 1997 which sets out all the CGT events for which you can make a capital gain or loss does not include the subdivision of land.

Section 112-25 of the ITAA 1997, deals with CGT assets that are spilt, changed or merged.

112-25(1) this section sets out what happens if:

(a) a *CGT asset (the original asset) is split into 2 or more assets (the new assets); or

(b) a *CGT asset (also the original asset) changes in whole or in part into an asset (also the new asset) of a different nature;

and you are the beneficial owner of the original asset and each new asset.

Example:

You subdivide a block of land into 3 separate blocks. Each of those blocks is a new asset.

112-25(2)

The splitting or change is not a *CGT event.

As seen above subsection 112-25(2) of the ITAA 1997 provides that splitting of the asset itself is not a CGT event and that if you subdivide a block of land into separate blocks each block is considered a separate CGT asset.

Taxation Determination TD 97/3 also advises the effect of subdividing the original land parcel into two or more assets, is each block is recognised as a separate asset and registered with a new separate title. Each subdivided block is considered to be a separate asset under the capital gains tax provisions.

Furthermore The Guide to capital gains tax 2009 -10 advises: 'If you subdivide or split a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided in two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks.'

In conclusion as advised above the act of subdividing a block of land whilst retaining ownership of all resulting blocks (assets), does not result in a CGT event under Division 104-10 or section 112-25 of the ITAA 1997. Therefore if the taxpayer subdivides the block of land and remains the owner of all resulting blocks of land a CGT event does not occur.

Question 2

Will the disposal of the subdivided land give rise to any capital gains tax implications under section 104-10 of the ITAA 1997?

As mentioned above land is defined as a CGT asset under subsection 100-25(2) of the ITAA 1997 and section 104-10 of the ITAA 1997, deals with disposal of CGT assets.

Section 104-10 of the ITAA 1997 provides:

Section 104-10 Disposal of a CGT asset: CGT event A1

104-10(1)

CGT event A1 happens if you *dispose of a *CGT asset.

104-10(2)

You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

104-10(3)

The time of the event is:

(a) when you enter into the contract for the *disposal; or

(b) if there is no contract - when the change of ownership occurs.

Example:

In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.

The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).

104-10(4)

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.

Therefore the taxpayer disposes of a CGT asset if a change in ownership occurs from them to another entity. This disposal of a CGT asset is a CGT event A1 in accordance with section 104-10 of the ITAA 1997.

When selling the subdivided land, if the taxpayer's capital proceeds exceeds the cost base, the excess is their capital gain from the event. Alternatively, if the reduced cost base exceeds the capital proceeds then this amount is their capital loss.

Taxation Determination TD 97/3 also states that you are taken to have acquired each of the subdivided blocks of land when the original land parcel was acquired.

In this case the taxpayer purchased the property in approximately December 1993 and is currently applying for approval to subdivide the land into two blocks. As per TD 97/3 the date of acquisition of the subdivided block of land is the date that original block of land was purchased. The purchase price the taxpayer paid for the original block in 1993 will be apportioned between the subdivided blocks to form part of the cost base or reduced cost base of the land. The taxpayer will make a capital gain or a capital loss when they sell the subdivided block.

Question 3

If the disposal does give rise to a capital gain, will you be entitled to discount your capital gain under section 115-25 of the ITAA 1997?

Division 115 of the ITAA 1997 deals with Discount Capital Gains.

Where a CGT event A1 occurs, such as the taxpayer selling the subdivided land, a discount is available on the capital gain where the following conditions in Division 115 of the ITAA 11997 are met:

1. the cost base has not been indexed; and

2. the asset must have been acquired at least 12 months before the CGT event.

Where these conditions are met, the capital gain is reduced by 50% for individuals (section 115-100 of the ITAA 1997).