Edited version of private ruling

Authorisation Number: 1011851810724

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Ruling

Subject: Capital gains tax - discount capital gain

Questions and answers:

Are you entitled to a discount capital gain if disposal occurs one year from acquisition?

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You purchased land in your personal name under a contract after 20 September 1985 with the intention to build a rental property.

Settlement occurred shortly after acquisition.

You received building consent and development approval almost 12 months later.

The slab was put on the land approximately 3 months later.

Completion is due in the 2011-12 income year.

You are now forced to sell the property within 5 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-20

Income Tax Assessment Act 1997 Section 100-25

Income Tax Assessment Act 1997 Section 108-55

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Reasons for decision

Capital gains tax

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Division 100 contains a guide to capital gains and losses and explains that capital gains tax (CGT) affects your income tax liability because your assessable income includes your net capital gain for the income year. Your net capital gain is the total of your capital gains for the income year, reduced by certain capital losses you may have made.

Section 100-20 advises that you can make a capital gain or loss only if a CGT event happens. The most common CGT event is CGT event A1 which occurs whenever there is a change in ownership for a CGT asset from one entity to another. Section 100-25 lists land and buildings as CGT assets.

Time of acquisition

The time a CGT asset is acquired is important as it determines whether you are eligible for the CGT discount.

Section 109-5 states that in general, you acquire a CGT asset when you become its owner. In the case of a CGT event A1, you acquire the asset when the disposal contract is entered into.

When you signed a contract to acquire the land a CGT event A1 took place and for CGT purposes this is the date of acquisition.

Discount capital gains

An assessable capital gain may be reduced by the CGT discount in Division 115. To be a discount capital gain, a capital gain must:

· be made by an individual, a complying superannuation entity, a trust, or by a life insurance company from a CGT event in respect of a CGT asset that is a complying superannuation/First Home Saver Account (FHSA) asset;

· result from a CGT event happening after 11.45 am EST on 21 September 1999;

· be worked out without the cost base being indexed; and

· result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months.

Taxation Determination 2002/10 advises that the 12-month period does not include the day of acquisition and the day of disposal.

Rate of discount - individuals, trusts, super funds

A discount capital gain remaining after applying any current year or prior year capital losses is reduced by the discount percentage when working out your net capital gain. The discount percentage is:

· 50% if the gain is made by an individual or a trust; or

· 33 ⅓% if the gain is made by a complying superannuation entity, an FHSA trust or a life insurance company from a CGT asset that is a complying superannuation/FHSA asset.

The discount percentage is not available to other entities, such as companies generally or life insurance companies in respect of assets that are not complying superannuation/FHSA assets.

Separate asset

The common law principle is that anything attached to land becomes part of the land. However, the exception to this principle provides that a building will be treated as a separate asset from the land to which it is affixed if the building is a depreciating asset for which a balancing adjustment must be worked out on sale, or the building is a post CGT asset and the land to which it is attached is a pre CGT asset (acquired before 20 September 1985).

In this case, the building you are constructing is not covered by the balancing adjustment provisions, nor was the land acquired pre CGT. Therefore, the building will not be treated as a separate asset and is taken to have been acquired on the date the land was purchased. 

Summary and conclusion

You will be taken to have acquired the building at the same time that you acquired the original block of land. Therefore as you will not enter into a contract to sell the property within 12 months of the date you acquired the land, you will be able to apply the 50% CGT discount to that sale.