Edited version of your private ruling

Authorisation Number: 1012014978973

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital gains tax and demolition/subdivision of pre CGT land and dwelling

Question

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 the semi detached dwelling that you are not occupying as your main residence?

4. Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

You own and occupy your principal place of residence.

The property consists of a dwelling on land that is less than 2 hectares.

The property was originally purchased prior to 20 September 1985 jointly with your spouse.

Your spouse passed away and you became 100% owner of the property on the title.

The property has always been your main residence and has not been used to produce income.

You plan to demolish the existing house and build a dual occupancy structure (semi).

When completed you will strata the land into 2 titles, one for each of the occupancies.

You will keep and occupy one as your main residence and sell the other.

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. Any gain or loss on the demolition of the houses is disregarded as you acquired the house before 20 September 1985.

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 on or before 19 September 1985. 

Apportionment

On subdivision of the land into smaller blocks, the cost base of the land usually needs to be apportioned between the smaller blocks (section 112-25).  However, as your land was acquired on or before 19 September 1985 no apportionment is required.

Capital improvements to pre- CGT land

A building or structure on land that you acquired before 20 September 1985 is a separate asset if:

You entered into a contract for the construction of the building or structure on or after 20 September 1985 or

Construction was started on or after that date when there is no contract for its construction.

In your case, the construction of the new dwellings will commence in the near future. These dwellings are located on your pre-CGT land. As the date that construction of the dwelling (which you will sell) will begin is after 19 September 1985, the dwelling will be treated as a separate CGT asset from the land.

Sale of semi detached dwelling

The sale of a semi detached dwelling 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 semi detached dwelling 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" of the dwelling consists of five elements, as set out in section 110-25. Briefly, these are:-

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

2.         Incidental costs of acquiring the dwelling, 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 of the dwelling and not the land, e.g. interest, rates, 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 dwelling (not the land), 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.

This means the cost base of the second dwelling will be the actual cost of building the dwelling 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).

As the CGT event will happen in respect of two separate assets, the capital proceeds have to be apportioned between the two pursuant to section 116-40 of the ITAA 1997.

The proceeds must be reasonably apportioned between the second dwelling and the land.

Any capital gain made in respect of the second dwelling and capital improvements will form part of the net capital gain and included in your assessable income.

Any capital gain made by you from the pre-CGT interest in the land is to be disregarded pursuant to the operation of paragraph 104-10(5)(a) of the ITAA 1997.

The CGT discount method

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

Please note that the questions you have asked regard GST have been sent to our GST area for consideration. You will receive a separate ruling addressing the GST issues in due course.