Edited version of your private ruling

Authorisation Number: 1012048052411

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Ruling

Subject: Capital gains tax

Question and answer:

Will an assessable capital gain arise on the sale of your interest in a dwelling that you used as a holiday home?

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

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.

Your sibling bought a vacant block of land before 20 September 1985.

On date A, after 20 September 1985, the land was transferred into joint names between you and your sibling as tenants in common in equal shares (50/50) for consideration of $M.

You and your sibling built a dwelling on the land.

The dwelling cost approximately $X to build and has been used as a family holiday home.

A few of your sibling's relatives lived in the dwelling at various times.

The dwelling was sold in the 2011-12 income year for $Y.

You estimate the agent's fees and legal fees to be approximately $Z.

On sale the profit on sale was split equally between your sibling and yourself.

You do not recall any major capital improvements - mainly painting, pest control/treatment, fencing, electrical work, shower screen repair and garden maintenance.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-55

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 115-100.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 121-10.

Income Tax Assessment Act 1997 Section 121-20.

Reasons for decision

A capital gain or capital loss can only arise if a CGT event happens to a CGT asset. Land and buildings are CGT assets. An interest in an asset is also treated as a CGT asset

A capital gain or capital loss is disregarded if you acquire an asset before 20 September 1985.

Ownership interest

You have an ownership interest in a property if:

· you have a legal or equitable interest in the land which the dwelling is erected upon; and

· you have a right or licence to occupy the dwelling.

Your sibling purchased a block of land before 20 September 1985. On date A, after 20 September 1985, the title of the land was transferred into joint names between you and your sibling. You acquired a 50% ownership interest in the land. As an interest in an asset is an asset, you acquired an asset at the time of transfer.

CGT events and transfer of title

The most common CGT event is CGT event A1 which happens when there is a disposal of an asset, such as the sale of a holiday home. You dispose of an asset when a change of ownership occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or if there is no written contract the time of the event is when the change of ownership occurs.

CGT event A1 happened on the date of the transfer of title into joint name. Although the land was bought by your sibling before 20 September 1985, the transfer of title happened after this date and thus you acquired a post CGT asset (a 50% interest in a block of land).

Building of holiday home

Under common law principles, anything that is attached to land becomes part of the land.

After 20 September 1985 you and your sibling built a house to be used as a family holiday home (dwelling). As the land was in joint name, you and your sibling also each had a 50% interest in the dwelling.

Where a dwelling is built after 20 September 1985 on land which was acquired before 20 September 1985, the dwelling is treated as a separate asset. Only the dwelling is subject to CGT and not the land as it is a pre-CGT asset.

As your ownership interest in the land is a post CGT asset, the construction of the dwelling is an improvement to the land and is not treated as a separate asset. You are taken to have acquired your interest in the dwelling on date A, after 20 September 1985, when you acquired your interest in the land.

Exemptions

There are a number of different exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part. One such exemption is the main residence exemption.

Main residence exemption

A capital gain or loss from a dwelling is ignored for CGT purposes if the person is an individual and the dwelling was the dwelling was the person's main residence throughout the ownership period. In your case you and your sibling were the legal owners of the property in question. No other persons had an ownership interest in the property.

The main residence or partial main residence exemption is not available to you as you did not use the dwelling as your main residence. Whilst other family members may have lived in the dwelling, this is not relevant for your main residence status.

The main residence exemption does not apply to you. There are no other exemptions applicable to your situation. Therefore you made an assessable capital gain on the sale of the holiday home.

How to calculate your capital gain or loss

You make a capital gain if the proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

Step 1 - Capital proceeds

The 'capital proceeds' refers to whatever a person receives as a result of a CGT event. Your share of the capital proceeds are half of the total proceeds received on sale of the dwelling.

Next you will need to calculate your share of the cost base of the dwelling.

Step 2 - Calculating the Cost Base:

The cost base of a CGT asset consists of five elements:

1.      The first element of your cost base includes money or property given for the asset. In your case, this is the amount you paid for your interest in the land ($M). If this amount is the equal to half of the market value of the block of land at the date of transfer, you use this value. Otherwise the market value substitution rule applies (see below).

2.      The second element of your cost base includes incidental costs you incurred in acquiring the asset or costs that relate to the CGT event, in this case the sale of the dwelling. (for example, stamp duty, consultant or legal advisor fees, valuation fees and advertising costs).

3.      The third element of your cost base includes non-capital costs of your ownership of the CGT asset, which include rates, land taxes, repairs and insurance premiums. However, you do not include such costs if you acquired the asset before 21 August 1991. Whilst you have indicated that you incurred expenses for repairs and other minor expenses, these costs will not be applicable in your case as you acquired the dwelling before this date (that is, you entered into the contract to construct the dwelling before 21 August 1991).

4.      The fourth element is capital expenditure that you incurred to increase the assets value. This includes your half share of the construction costs of the dwelling.

5.      The fifth element is capital expenditure you incurred to establish preserve or defend your title to the asset, or a right over the asset.

In your case the applicable elements will be the first, second and fourth elements.

Market value substitution rule

The market value substitution applies to make the first element of the cost base the market value of the land on the date you acquired it. This rule is applicable if you and your sister did not deal at arms length when you acquired your interest in the land.

In working out the market value of your interest in the land, Taxation Determination TD 10 provides that in determining the market value of an asset, you can choose to 

· obtain a detailed valuation from a qualified valuer; or,

· compute their own valuation based on reasonably objective and supportable data  

Step 3 - Calculating your capital gain

Your capital gain is the difference between your capital proceeds and your cost base.

Step 4 - Calculating your net capital gain

Where a person has held a CGT asset for more than 12 months they may be eligible to index the cost base (if acquired on or before 11.45am on 21 September 1999) or eligible to discount the capital gain.

Discount method

You can use the discount method to reduce any capital gain you make on the sale of a property if

· you are an individual

· a CGT event happens to an asset you own after 21 September 1999

· you will have owned the CGT asset for more than 12 months, and

· the cost base will not be indexed.

The discount percentage for individuals is 50%. The discount is applied to the discount capital gain only after any applicable reductions are made (if any) and all current and prior year capital losses are applied. As you satisfy the above conditions, you can use the discount method.

In your case you can also use the indexation method as you began constructing the holiday home before 21 September 1999. We refer you to our website www.ato.gov.au for details of this method.

Record keeping for CGT purposes

Generally, you must keep records of matters that affect the capital gains or losses that you make. In particular, you must retain the records for five years after the last relevant CGT event, i.e. sale of your holiday home.

You must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss. The records must show:

· the nature of the act, transaction, event or circumstance

· the date it happened

· who were the parties to the transaction, and

· how the act, transaction, event or circumstance is relevant to working out the capital gain or capital loss. 

Accordingly, substantiation must be kept for costs included in the cost base of the CGT asset.

If you do not have accurate records about a transaction, you must reconstruct those records otherwise you are not entitled to include the transaction in the cost base.