Edited version of private ruling

Authorisation Number: 1011829286052

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Ruling

Subject: Capital gains tax - demolition, subdivision and disposal of two dwellings

Question 1: Did a capital gains tax (CGT) event occur when you transferred a 50% interest in your property to your spouse?

Answer: Yes.

Question 2: Can you disregard the capital gain or capital loss made on the disposal of your interest in the two subdivided blocks of land?

Answer: No.

Question 3: Do you use the market value of the land at the time you moved out of the demolished dwelling to calculate any capital gain or capital loss made on the disposal of the subdivided land?

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 200X you purchased a property (the property) solely in your name.

You established the property as your main residence.

In 2010, you transferred a 50% interest in the property into your spouse's name.

The existing dwelling was demolished.

You and your spouse did not receive any proceeds from the demolition of the existing dwelling.

You and your spouse are currently constructing a number of dwellings on the property.

You and your spouse will reside in one dwelling (dwelling A) and dispose of the other dwellings.

The development of the property by you and your spouse was not undertaken as a business venture.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 104-20

Reasons for decision

The most common CGT event (CGT event A1) happens when you dispose of an asset to someone else. The time of the event is when you enter into the contract for its disposal or if there is no contract when the change of ownership occurs.

When you transferred a 50% interest in the property to your spouse, CGT event A1 occurred as a change of ownership occurred.

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.

Capital proceeds is the term used to describe the amount of money or the value of any property you received or are entitled to receive as a result of a CGT event happening.

There are special rules for calculating the capital proceeds if you dispose of an asset where you do not receive any proceeds. Where this occurs, the capital proceeds must be calculated in accordance with the market value substitution rules. Under these rules the time of the event is when the property is transferred and the value of the property is its market value on this date.

Note: There are no exceptions or exemptions for transferring an asset to a spouse, except in the circumstances of a marriage breakdown.

Demolition of main residence dwelling

You are only entitled to the full main residence exemption where all of the following are satisfied:

· there was a dwelling on the property when you disposed of it

· the dwelling was your main residence for the whole of your ownership period

· you did not choose to treat any other dwelling as your main residence

· any land on which the dwelling is situated must be less than two hectares, and

· you must not have used the dwelling to produce assessable income.

The primary requirement for a full or partial exemption is that there must be a dwelling on the land when you dispose of it. The only exception to this primary requirement is when a dwelling has been accidentally destroyed.

Your entitlement to any full or partial main residence exemption will cease when the dwelling (main residence) is demolished. The capital gain or capital loss made on the disposal of the remaining subdivided blocks cannot be disregarded.

You will be entitled to main residence exemption on dwelling A as you and your spouse will establish it as your main residence upon completion of the dwelling.

Subdivision of land

The subdivision of the original land itself is not considered a CGT event.

Where a property that was acquired as one asset is subdivided, the resulting subdivided blocks are treated as though they were always separate assets.

The acquisition date of the subdivided blocks will be the date you originally purchased the land.

Disposal of the subdivided blocks

When you dispose of the two subdivided blocks CGT event A1 will occur. Any capital gain or capital loss made is calculated by subtracting the cost base of each block from the capital proceeds received for each block.

As you acquired the subdivided blocks after 20 September 1985, and they are not being disposed of at the same time as your main residence, any capital gain or capital loss made on their disposal is not disregarded.

Calculating the cost base for each subdivided block

As you disposed of a 50% interest in the land to your spouse, any capital gain or capital loss made on this disposal of this interest is disregarded as it was your main residence and you are entitled to the full main residence exemption.

The starting point for calculating the cost base of your 50% interest in each of the subdivided blocks is what you paid for (50%) of the land in 200X. As you did not receive any proceeds for the demolition of your former home there is no alteration to this amount. You need to apportion/divide this amount between all the blocks on a reasonable basis.

A reasonable apportionment can usually be achieved on an area basis if the blocks are of a similar size and market value, alternatively on a relative market value basis if this is not the case. Taxation Determination TD 97/3 gives guidance in regard to this matter. A copy is included for your reference.

Another element of the cost base is the cost of subdivision. These costs are also apportioned between all the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market value of the blocks. However, any cost solely related to one block should be attributed to that block, for example the cost of connecting services.

Note: Whilst the disposal of each block can be considered a separate CGT event A1, the anti-overlap provisions may operate to reduce or exclude these amounts from being included as a capital gain as they may be assessed as ordinary assessable income.