Edited version of private ruling

Authorisation Number: 1011916853932

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Subject: Capital gains tax - separate assets - main residence exemption - partial exemption - cost base - apportionment

Question: Do you need to do a valuation, at the time you move your dwelling or commenced to construct the rental property, to determine the cost base of the two blocks of land and the dwelling?

Answer: No.

This ruling applies for the following period:

Income year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You purchased a property after 20 September 1985. The property consisted of two blocks of land, Block A and Block B, on separate titles with a dwelling situated on both blocks.

The dwelling is your main residence.

You applied for, and received, development approval for your plans to move the existing dwelling solely onto Block A, and the construction of a new dwelling on Block B.

A number of years later, the existing dwelling was moved onto Block A, and it remains your main residence.

You borrowed funds to construct the dwelling on Block B and the new dwelling is rented out.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Summary

Your cost base and reduced cost base is based on the actual cost you incurred.

Detailed reasoning

You may make a capital gain or capital loss when a capital gains tax (CGT) event occurs to a CGT asset. The most common event is CGT event A1 which occurs when you dispose of your ownership interest in a CGT asset to another entity.  

The removal of a building from a block of land does not result in any CGT event happening as it is not a disposal because there is no change in ownership in the land or the building. Rather, the asset is split into separate assets, being the land and the building (with a subsequent merging of the building with one of the blocks of land).

The subsequent sale of any of the blocks should not be treated as a disposal of part of the original asset; instead it should be treated as the disposal of an asset in its own right, with that asset being treated as having been acquired by you at the same time as the original land.

The respective costs bases of the vacant block of land and the block of land with the relocated dwelling on it will be based on an apportionment of the original cost base or reduced cost base of the original asset (land and dwelling).

The Commissioner will accept any reasonable method of apportioning the original cost base between the separate assets. A reasonable apportionment of the original cost of 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.

When you dispose of a dwelling, CGT event A1 happens. Generally you can disregard a capital gain or capital loss made on the disposal of a dwelling that is your main residence if:

· the dwelling was your main residence for the whole period you owned it;

· the dwelling was not used to produce assessable income; and

· any land on which the dwelling is situated is not more than two hectares.

When a dwelling has been your main residence for only part of your ownership period, you may be eligible to a partial main residence exemption which is calculated on a time basis, with the capital gain or capital loss made being reduced proportionally.

A partial capital gain or capital loss is calculated using the following formula:

Capital gain or capital loss amount X Non-main residence days

Total ownership period days

Application to your case

In your case, you acquired a dwelling located on two blocks of land, Block A and Block B, after 20 September 1985. You moved the existing dwelling onto Block A a number of years later. No CGT event occurred when the dwelling was relocated as your ownership interest in the dwelling did not cease.

The dwelling was your main residence and continued to be your main residence after it was relocated onto Block A. As the dwelling and Block A has been, and continues to be your main residence, a full main residence exemption will continue to apply to the dwelling and Block A as long as the conditions for the full exemption listed above are met.

The cost base or reduced cost base of Block B will be calculated by apportioning the original cost base of the two blocks of land and the dwelling immediately before the date the dwelling was relocated between the separate blocks of land. This can be calculated using a reasonable method of apportionment such as the market value of each block of land and the dwelling just prior to the date of removal.

Any costs solely attributable to a particular block, such as borrowing costs and construction costs, will be attributable solely to that block. In this case, you have incurred borrowing costs and construction costs in relation to the building of the new dwelling on Block B. These costs will form part of the combined cost base of Block B and the new dwelling when they are disposed of.