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Ruling

Subject: CGT

Question and Answer

1. Will the taxpayer make a capital gain on demolition of their old home?

No.

2. Will the taxpayer make a capital gain when they subdivide?

No.

3. Will the taxpayer make a capital gain or loss on the sale of the block that is not their main residence?

Yes.

This ruling applies for the following period

1 July 2011 to 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Post 20 September 1985 the taxpayer purchased a residence.

The taxpayer used the residence as their principle place of residence.

The taxpayer bulldozed the residence and obtained approval to subdivide the block.

The taxpayer did not receive any money from the demolition of the residence.

The taxpayer sold one block and commenced building your future home on the other block.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Subsection 108-5(2)

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 118-110

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

Income Tax Assessment Act 1997 Section 118-150

Reasons for decision

Demolition of a Dwelling

Section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event C1 happens if a CGT asset owned by a taxpayer is lost or destroyed.  Subsection 108-5(2) of the ITAA 1997 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 of the ITAA 1997.

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 of the ITAA 1997.  This is because the dwelling was considered to be the taxpayer's 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 a taxpayer subdivides 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, the taxpayer does not make a capital gain or loss at the time of subdivision.

The taxpayer is taken to have acquired the subdivided blocks when they 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 of the ITAA 1997). 

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

Where the taxpayer subdivides 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 one block

The sale of one block results in a CGT event A1 occurring. Section 104-10 of the ITAA 1997 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 the taxpayer enters into the contract for the sale of the property.

The taxpayer makes a capital gain if the capital proceeds from the disposal are more than the asset's cost base.

The taxpayer makes a capital loss if those capital proceeds are less than the asset's reduced cost base.

When the taxpayer sold the block they will need to work out the cost base of the block to enable them to calculate the capital gain or loss.

Cost base

The "cost base" consists of five elements, as set out in section 110-25 of the ITAA 1997. Briefly, these are:

Money paid or required to be paid for the land

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

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.

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.

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

The cost base of the block will be the apportioned cost base of the land 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 the taxpayer has received, or are entitled to receive, in respect of the event happening; and the market value of any other property the taxpayer has received, or are entitled to receive, in respect of the event happening (subsection 116-20(1) of the ITAA 1997).

The capital proceeds will be the amount received from the block.

Main residence exemption for the block you retain

The taxpayer 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 they make a valid choice under section 118-150 of the ITAA 1997, 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 the taxpayer:

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

· makes a choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling is constructed as their main residence from the time that the demolished or destroyed dwelling was last occupied by them; 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 their main residence

The effect of making a choice under section 118-150 of the ITAA 1997 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 the taxpayer's main residence and the completion of the new dwelling in which will be their main residence.