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Ruling

Subject: Capital gains tax

Questions and answers:

1. Will you make a capital gain on demolition of your old home?

No.

2. Will you make a capital gain when you subdivide?

No.

3. Will you make a capital gain or loss when you sell a town house that was not your main residence?

Yes.

4. Will you make a capital gain or capital loss on the sale of the town house that was your main residence?

No.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You and your spouse purchased your current property after 20 September 1985 as joint tenants both holding a 50% share in the house.

You and your spouse have used this property as your main residence for the whole of your ownership period.

You and your spouse intend to demolish your existing home and sub-divide the land into two blocks.

The sub-divided blocks will be in both your names joint tenants 50-50 as the original undivided block.

You will not receive any money for the demolition.

You intend to build a town house on each block.

You intend to live in one town house and use it as your main residence and sell the second town house or rent it out.

You will make the choice under section 118-150 to continue to treat the land that the new house is constructed on as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 110-1

Income Tax Assessment Act 1997 Subsection 116-20(1)

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Subsection 118-150(4)

Reasons for decision

Demolition of a dwelling

Section 104-20 provides that capital gains tax (CGT) event C1 happens if a CGT asset owned by a taxpayer is lost or destroyed.  It should be noted that subsection 108-5(2) allows this event to happen to part of a CGT asset.

The demolition of a house would fall within the definition of destruction for the purpose of CGT event C1.

CGT event C1 happens when the destruction occurs.

In the case of a part disposal of an asset, the cost base and reduced cost base of the building would be calculated in accordance with section 112-30. Applying the formula the cost base of the building is nil. The cost base of the remaining part will be the cost base/reduced cost base of the asset just before demolition.

Generally as the cost base and capital proceeds are nil a capital gain or capital loss would not be made. However if a capital loss was made it is exempt under section 118-110.  This is because the dwelling was considered to be your main residence up until its demolition.

Note:

If a building is demolished, there is no deemed market value consideration for the disposal that occurs as a result of the demolition.  This is because the market value substitution rules do not apply where CGT event C1 occurs.

Subdivision of land

When you subdivide a block of land, each smaller block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing the land does not in itself change the ownership of the subdivided blocks. Therefore, you do not make a capital gain or loss at the time of subdivision.

You are taken to have acquired the subdivided blocks when you acquired the original land and house. 

Apportionment

On subdivision of the land into smaller blocks, the cost base of the land needs to be apportioned between the smaller blocks (section 112-25). 

Taxation Determination 97/3 provides that the Commissioner will accept any reasonable method of apportioning costs between different assets, for example area basis or valuation. 

Where you subdivide land the Commissioner considers that survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market values of the blocks. 

The costs of connecting electricity and water, to an individual block that is to be sold, may be attributed solely to that block.

Sale of town house

The sale of a town house results in a CGT event A1 occurring. Section 104-10 provides that an A1 event happens if you dispose of a CGT asset. A disposal occurs if there is a change of ownership. The time of the event is when you enter into the contract for the sale of the property.

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.

When you sell the Town house that is not your main residence you will need to work out the cost base of the unit to enable you to calculate the capital gain or loss.

Cost base

The "cost base" consists of five elements, as set out in section 110-25. Briefly, these are:-

1. Money paid or required to be paid for the land

2. Incidental costs of acquiring the land, or costs in relation to the CGT event, e.g. stamp duty, legal fees, accountant's advice, etc.

3. Non-capital costs you incur in connection with your ownership, e.g. interest, rates, land tax, repairs and insurance premiums (provided that you have not, or could not have claimed these costs as a "deduction").  You can include non-capital costs of ownership only in the cost base of assets acquired after 20 August, 1991.

4. Capital expenditure you incur to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event, e.g. construction costs of the new residences.

5. Capital expenditure you incur to preserve or defend your title or rights to the asset.

The cost base of the town houses will be the apportioned cost base of the land PLUS the cost of building the town houses PLUS other costs incurred as outlined above.

Capital Proceeds

Division 116 explains how to work out what the capital proceeds are from a CGT event. The capital proceeds from a CGT event are the total of  the money you have received, or are entitled to receive, in respect of the event happening; and  the market value of any other property you have received, or are entitled to receive, in respect of the event happening subsection 116-20(1).

The capital proceeds will be the amount received from the sale of the town house.

Calculating your capital gain

The CGT discount method

As you have held the asset for at least 12 months, you may choose to include only fifty percent of your capital gain in your assessable income.

Using the CGT discount method, you calculate your capital gain as follows:

Capital proceeds - cost base = capital gain

Main residence exemption 

You will qualify for a full main residence exemption for a dwelling that was built to replace a main residence that was demolished or destroyed provided you make a valid choice under section
118-150, and satisfies certain conditions.

Ordinarily where a dwelling is demolished or destroyed and a new dwelling is constructed, the main residence usage of the first dwelling would not count towards an exemption for the new dwelling and land.

However if you:

· build a dwelling to replace a demolished or destroyed main residence; and

· make a choice under section 118-150 to treat the land on which the new dwelling is constructed as your main residence from the time that the demolished or destroyed dwelling was last occupied by you; and

· there is not more than four years between the time the demolished or destroyed dwelling was last occupied and the time the new dwelling became your main residence

the two dwellings may be treated as one and the main residence usage of the former will count towards the main residence exemption for the new dwelling and land.

The effect of making a choice under section 118-150 in these circumstances will be that there is an unbroken period of occupancy of a main residence on the land from the time when the first dwelling became your main residence until the new dwelling ceases to be your main residence.