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Authorisation Number: 1011842637282

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Ruling

Subject: CGT - Subdivision

Question and answer

1. Does a subdivision of a block of land you acquired before 20 September 1985 result in a CGT event?

No.

2. Are the dwellings built on the land separate CGT assets?

Yes

This ruling applies for the following period:

30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You and your spouse purchased a block of land before 20 September 1985.

You and spouse entered into a contract to build two properties after 20 September 1985.

You and your spouse sub-divided the land.

There was no change in ownership title.

You and your spouse used property B to produce rental income.

You and your spouse sold property B.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Subsection 112-25(2) of the Income Tax Assessment Act 1997

Section 104-10 of the ITAA 1997 of the Income Tax Assessment Act 1997

Reasons for decision

Subdivision of land

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

The most common event is CGT event A1. CGT event A1 happens when you dispose of an asset to someone else. You have disposed of an asset if a change in ownership occurs from you to another entity (section 104-10 of the ITAA 1997). The capital gain or capital loss is disregarded if you acquire the asset before 20 September 1985.

The subdivision of land does not constitute a CGT event (subsection 112-25(2) of the ITAA 1997) if the resulting titles remain the same as the original title. If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into 2 or more separate blocks.

Therefore, as there will be no change in the titles after subdivision you did not make a capital gain or capital loss at the time of subdivision. In addition, the subdivided blocks will retain the original acquisition date of the land.

Construction of Building on Pre-CGT Land

A building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if:

· you entered into a contract for the construction on or after that day; or

· if there is no contract - the construction started on or after that day.

As you acquired the land prior to 20 September 1985 (pre-CGT), and constructed the dwelling after that date (post-CGT), for the purposes of capital gains tax, the dwelling will be considered to be a separate CGT asset from the land.

Calculating Capital Proceeds

When the rental property was sold, a change in legal ownership occurred and CGT event A1 took place. When calculating if a capital gain or capital loss has been made it is necessary to apportion the capital proceeds.

Your capital proceeds will be in relation to the building (which will be subject to capital gains tax) and the land (which will not be subject to capital gains tax). You will need to apportion the proceeds between the two separate assets (section 116-40 of the ITAA 1997).  While the legislation does not give any guidelines on how this apportionment is to be made, Taxation Determinations TD 98/24 provides that the apportionment should be based upon market values of the separate assets at the time of the sale.