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Authorisation Number: 1012037505632

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Ruling

Subject: Capital gains tax: subdivision of land

Question

Will the proceeds from the sale of the subdivided block containing the house be subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will you be able to disregard any capital gain or capital loss from the sale of the subdivided block containing the house under the main residence exemption in Subdivision 118-B of the ITAA 1997?

Answer

Yes - up to a maximum of 2 hectares.

Question 3

Will you satisfy the basic conditions for eligibility for the small business CGT concessions under section 152-10 of the ITAA 1997 in relation to the subdivided block containing the house?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You purchased a property more than 15 years ago.

You have been operating a business on the property since purchase.

You constructed a dwelling on the property several years after purchase. The dwelling was your main residence for the whole period since it was constructed and was never used to produce assessable income. The only other use of the dwelling was one of the rooms being used in relation to the business for a short period. This room was subsequently turned into a bedroom.

The property is currently on the market. You are also considering subdividing the property into two blocks.

You will be using the proceeds from the sales to fund your superannuation.

There was no intention to subdivide when the property was originally purchased.

You would be undertaking the subdivision in partnership.

You have not been involved in any previous subdivision and you have no plans to carry out any additional subdivision.

No other parties will be involved in the subdivision.

No additional improvements except those necessary to obtain council approval will be carried out. Also no additional houses or infrastructure will be built by you.

You will continue to operate the business while you retain ownership of any part of the land. You intend to retire as soon as the entire property is sold, either as one property or two subdivided blocks. If only one subdivided block sold, you would only retire when the other block was sold.

You are both over 55 years of age.

The applicant has advised that you both satisfy the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-105

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Summary

The proceeds from the sale of the subdivided block containing the house will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997, however you may be able to disregard all or part of any capital gain resulting from the disposal of your interests in the block under the main residence exemption and/or the small business 15-year exemption.

Detailed reasoning

The sale of the subdivided block containing the house will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997 as the sale will involve the disposal of CGT assets.

The relevant CGT assets in this case will be your individual interests in the subdivided block to be sold. The date you acquired your interests in this subdivided block is the date you acquired your interests in the original parcel of land, and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.

Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks and you will therefore not make a capital gain or a capital loss at the time of the subdivision. CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of your interests in each of the subdivided blocks.

You will make a capital gain if the capital proceeds from the disposal of each of your interests in the subdivided block is more than the cost base of the interest. You will make a capital loss if those capital proceeds are less than the reduced cost base of the interest.

Anti-overlap provisions

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains arising as a result of the disposal of your interests in the block by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997 as a result of the sale, for example, as ordinary income under section 6-5 of the ITAA 1997.

We consider, however, that based on the information supplied by you, any profit from the sale of the subdivided block would not be included in your assessable income either as ordinary income under section 6-5 of the ITAA 1997 or under any other provision of the ITAA outside of Part 3-1 of the ITAA 1997, and the anti-overlap provisions in section 118-20 of the ITAA 1997 will therefore not apply in your case.

Main residence exemption

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or loss is disregarded when one of the CGT events specified in subsection 118-110(2) of the ITAA 1997 happens to a CGT asset that is a dwelling or an ownership interest in it if certain conditions are satisfied.

If you sell any of the land adjacent to your dwelling separately from the dwelling, the land is not exempt. It is only exempt when sold with the dwelling. The main residence exemption will therefore apply in relation to the sale of the interests in the subdivided block containing the house (dwelling) if the following conditions are satisfied:

· you are an individual

· the dwelling was your main residence throughout the ownership period and

· the interest did not pass to you as a beneficiary in, and was not acquired as a trustee of, the estate of a deceased person.

A full exemption from CGT applies if the dwelling was your home for the whole period you owned it and the dwelling was not used to produce assessable income.

Sections 118-185 and 118-190 of the ITAA 1997 provide for partial exemptions where the dwelling was the main residence for only part of the ownership period, or the dwelling was used to produce assessable income.

Section 118 -120 of the ITAA 1997 extends the exemption to land adjacent to the dwelling if:

· during the period you owned it, the land is used mainly for private and domestic purposes in association with the dwelling and

· the total area of the land around the dwelling, including the land on which it stands, is not greater than two hectares. If the land used for private purposes is greater than two hectares, you can choose which two hectares are exempt but the land you choose must include the land on which the dwelling is built.

Applying the above guidelines to your circumstances, you will be able to disregard any capital gain or loss in relation to each of your interests in the dwelling located on the property as the dwelling was your main residence for the entire period since construction, and the dwelling was never used to produce assessable income. The short period during which one of the rooms was used in relation to the business would not be the use of the dwelling to produce assessable income.

You will be able to extend this exemption to land adjacent to the dwelling if the above conditions in section 118-20 of the ITAA 1997 are satisfied. You will not, however, be able to apply the main residence exemption to any capital gain or loss from the disposal of your interests in the subdivided block which does not contain the dwelling.

Small business 15-year exemption

Under the small business 15-year exemption in section 152-105 of the ITAA 1997, you can disregard any capital gains in relation to the disposal of your interests in the subdivided block containing the house if all of the following conditions are satisfied:

· the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain

· you continuously owned your interests in the subdivided block for the 15-year period ending just before the CGT event and

· either:

· you are 55 or over at the time of the CGT event and the event happens in connection with your retirement or

· you are permanently incapacitated at the time of the CGT event.

Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are:

· a CGT event happens in relation to a CGT asset in an income year. This condition does not apply in the case of CGT event D1

· the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

· at least one of the following applies:

· you are a small business entity for the income year

· you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

· you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership or

· the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

· the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Applying the above guidelines to your circumstances, conditions (a) and (b) above for section 152-105 of the ITAA 1997 would be satisfied on the basis of the information supplied by you. You will, however, also need to satisfy condition (c), and condition (c)(i) will be the relevant condition which will need to be satisfied by you.

You are both over 55 years of age and this part of condition (c)(i) will be satisfied. The CGT event, that is, the sale of the subdivided block containing the house, however also needs to happen 'in connection with your retirement'.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce. A CGT event may be in connection with retirement even if it occurs at some time before retirement.

Therefore, if you retire, or significantly reduce the number of hours you work or significantly change the nature of your present activities following the sale of the subdivided block containing the house, this condition will be satisfied and you will be able to disregard any capital gain from the disposal of this block. If you do not satisfy these requirements, you will not be able to disregard any capital gain under the small business 15-year exemption.

Should you proceed with the subdivision and you are unable to determine whether you satisfy this requirement, you can apply for another private ruling in relation to this issue.

Note

Our website at www.ato.gov.au contains information about other small business CGT concessions which could apply in your case if you can not disregard any capital gain under the small business 15-year exemption. The publication Advanced Guide to Capital Gains Tax Concessions for Small Business, which is available on our website, also contains examples in relation to the determination of 'in connection with your retirement'.