Edited version of private ruling

Authorisation Number: 1011756538854

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Ruling

Subject: Capital gains tax and subdivision of land

Questions and answers:

Are you required to include a capital gain or capital loss in your income tax return in the year that you sell your property?

Yes.

Are you entitled to any main residence exemption when you sell your property?

No.

Are you entitled to the 50% discount when you sell your property?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You purchased a property with a dwelling on it in several years ago.

You lived in the dwelling as your main residence for a number of years.

You moved out of the dwelling in 2010.

You are currently living with family.

You have subdivided the property into two blocks of land and demolished the dwelling.

You are building a dwelling on each block of land.

The block of land and house on the front block of land, where the original dwelling used to be, will be sold.

You will never live in the new dwelling on the front block of land.

You will not be selling the back block of land. You will live in the dwelling on the back block of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-35.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-150.

Reasons for decision

You make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1. A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs.

Construction and sale of new dwelling

You can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

You can choose to apply the main residence exemption as if the dwelling that you are building, repairing or renovating on the land were your main residence from the time you acquired the ownership interest where the following conditions are met:

· a dwelling on the land that you construct, repair or renovate becomes your main residence as soon as practicable after the work is finished, and

· it continues to be your main residence for at least 3 months.

In your case, the original dwelling was your main residence for a number of years. You have now demolished this dwelling and you are building a new dwelling. You will not be living in the new dwelling and therefore it will not be your main residence.

When you sell the property with the new dwelling on it, CGT event A1 will happen. The new dwelling will not satisfy the main residence exemption because at no point in time have you lived in the dwelling.

Therefore, when you sell the property with the new dwelling on it, you cannot claim the main residence exemption, and any capital gain or capital loss made must be included in your income tax return.

Calculating the capital gain

You make a capital gain where the capital proceeds exceed the cost base.

Generally, the capital proceeds are the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event.

The cost base of an asset is generally what the asset costs you. The cost base is made up of five elements:

· money paid for the asset

· incidental costs of acquiring or selling it (e.g. stamp duty, conveyancing, real estate agent fees)

· cost of owning it (e.g. repairs)

· cost associated with increasing or preserving its value

· cost to preserve or defend a taxpayer's title or right to it

Where you make a capital gain, it must be included in your income tax return in the year that the CGT event happened.

As you jointly own the property, you must both include your share of the capital gain in your individual tax returns.

Cost base of subdivided land

The disposal of a subdivided block is treated as the disposal of an asset in its own right, and not as a disposal of part of an asset (the original land parcel). When the land is subdivided the cost base of the original land should be apportioned on a reasonable basis between the 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.

CGT discount

If an individual makes a capital gain from a CGT event to a CGT asset, the individual will be taxed on 50% of the gain. The CGT asset must have been acquired by the taxpayer at least 12 months before the CGT event.

In your case you have owned the property for more than 12 months. Therefore, when you sell the property (and CGT event A1 happens), you will be entitled to apply the discount, and therefore only be taxed on 50% of the capital gain.