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Ruling

Subject: CGT consequences of subdividing your house

1. Will you be subject to capital gains tax (CGT) if you subdivide your house (back portion) from the vacant land (front portion) keeping the legal ownership of the subdivided blocks same as that of the original block?

No

2. Will you be subject to CGT if you transfer your share of ownership of the front portion to your relative?

Yes

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your house, which is your main residence, is in joint names with your relative's share of 50% ownership and yours and your spouse's share of 25% each.

This is also the main residence of your spouse and relative.

You bought the property in mid 2001.

The total area of the property is a little over one thousand square meters.

You want to sub-divide this property into two separate titles. The front portion will be vacant land and the back portion will contain your house.

Upon subdivision you intend to keep same percentage of ownership for both the titles as the original title. You and your spouse will then give up your ownership of 25% each and transfer 100% ownership of the front portion to your relative, with your relative giving up their ownership of 50% for the back portion and transfers it to you and your spouse.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-165

Reasons for decision

Subdivision of land

Subdivision itself is not a CGT event. The acquisition date of the subdivided block will be your original purchase date.

So you will not be subject to capital gains tax (CGT) if you just subdivide your house (back portion) from the vacant land (front portion) and not change the ownership interests.

However, you may make a capital gain or capital loss when you dispose of the subdivided blocks.

The cost base of the original land is apportioned between the subdivided blocks on a reasonable basis.

Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, that is on an area basis or relative market value basis.

For example, you subdivide land. Part of the land has a house worth 75 per cent of the total market value of the original property. The balance of the land is a vacant block. It would be reasonable in the circumstances to apportion 75 per cent of the original acquisition cost of the property to the land with the house and 25 per cent to the vacant block.

A reasonable apportionment of the original cost of the land itself 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.

The costs of subdivision should also be apportioned between 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 relative market values of the two blocks. However, any cost solely related to one block should be attributed to that block (such as the costs of connecting electricity and water to the block, which is to be disposed of, should be attributed solely to that block.

Capital gains tax

Capital gains tax (CGT) A1 event happens if you dispose of a CGT asset; the time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.

A CGT event A1 will occur when you transfer your interest of 25% in the property to your son.

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 CGT rules that apply if a person receives no capital proceeds from a CGT event; you are taken to have received the market value of the asset at the time of the event.

Main residence

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence if:

- the dwelling was your home for the whole period you owned it

- the property was not used to produce assessable income; and

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

The main residence exemption can be extended to land up to two hectares adjacent to the dwelling to the extent that the land was used primarily for private or domestic purposes in association with the dwelling and disposed of at the same time as the dwelling to the same purchaser.

How this applies to your arrangement

As stated above the main residence exemption does not apply to the subdivided block of land if you dispose of the subdivided land separately from your main residence.

Therefore, CGT will apply to the disposal of the subdivided block to your relative. You will be taken to have received the market value of the block of land on the date you transfer your share of ownership of the subdivided land (the front portion) to your relative.