Edited version of private ruling

Authorisation Number: 1011826584975

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Ruling

Subject: capital gains tax - land subdivision

Question

Are you entitled to a capital gains tax exemption when you subdivide your property and transfer it to your children?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced in:

1993

Relevant facts and circumstances

You own a property consisting of a house and land, which was originally purchased in the 1940's by your grandparents. You resided in this property from your birth until you got married. You and your spouse purchased the property from your parent to allow them to acquire a small unit for retirement after 20 September 1985.

You are going to subdivide the back half of the property and build two home units, one for each of two of your children. The titles will be transferred into your children's names once the units are built. Your children will pay you in monthly instalments, which will supplement your and your spouse's retirement. When you and your spouse pass away any remaining amounts owing on the two home units will be erased.

Reasons for decision

Summary

You are not entitled to a capital gains tax exemption when you subdivide your property and transfer it to your children.

Detailed reasoning

The subdivision of land and construction of a dwelling does not become a capital gains tax (CGT) event until ownership interest in the land changes. Each subdivision is simply registered under a separate title and becomes separate dwellings. A CGT event will occur when each subdivision is disposed of. The most common disposal of an asset occurs when ownership changes. For example a name transfer on an asset's title.

The term dwelling means a building that consists wholly or mainly of residential accommodation. Land fenced off around a new dwelling is considered part of that dwelling and forms a new separate asset.

Any capital gains or capital losses made from assets acquired after 20 September 1985 are subject to the CGT provisions. A dwelling that is a main residence is however exempt throughout the period you owned it. The adjacent land is also exempt providing it is sold with the dwelling, is less than two hectares and is used primarily for private or domestic purposes in association with that dwelling.

In your case, you acquired the property with your wife when the title was transferred out of your parent's name. This asset was therefore acquired after 20 September 1985 and is subject to the CGT provisions.

You are adding two additional dwellings to the land which you will never have resided in. Furthermore a CGT event will occur after the dwellings are built when you transfer each title into your children's names. Therefore these two dwellings and their associated land are subject to any capital gains or losses made at this time compared to when it was purchased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20,
Income Tax Assessment Act 1997 Section 112-25,
Income Tax Assessment Act 1997 Section 118 -110,
Income Tax Assessment Act 1997 Subsection 118 -115(1) and
Income Tax Assessment Act 1997 Section 118 -120.