Edited version of your private ruling

Authorisation Number: 1012100877107

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Ruling

Subject: Capital gains tax - deceased estate, construction of new dwelling and disposal

Question 1: Upon subdivision of the land, is the cost base of the original land apportioned on a reasonable basis between the subdivided blocks?

Answer: Yes.

Question 2: Is the capital gain or capital loss made on the disposal of the dwelling disregarded?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced 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 parent A acquired a vacant block of land (the property) solely in their name in 1954.

Your parents constructed a dwelling on the vacant land.

Your parents moved in and established the property as their main residence.

Your parent A passed away in mid 1998.

Your parent B acquired the property from your parent A upon their death

In late 2010, your parent B moved into an aged care facility.

After your parent B moved out of the property it was rented out.

The property is currently rented out and the lease is about to expire.

The trustee of the estate has elected to treat the property as the deceased's main residence during your parent B's absence.

Your parent B passed away in late 2011.

Probate has been granted.

You and your siblings inherited an equal interest in the property.

The title of the property will be transferred into the beneficiaries' names within two years of your parent B's death.

You and your siblings will demolish the existing dwelling and subdivide the land into specified number of lots.

You and your siblings will receive no capital proceeds from the demolition of the existing dwelling.

You will acquire one of the subdivided blocks of land.

You will construct a dwelling on the vacant land and then dispose of the dwelling and land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 116-25

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The most common capital gains tax (CGT) event, CGT event A1, occurs when you dispose of a CGT asset, the time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

CGT event A1 will occur upon the disposal of the subdivided block of land and dwelling.

Deceased estate

Any capital gain or capital loss you make from a CGT event that happens to a dwelling that has passed to you as the executor or beneficiary of a deceased estate is disregarded if the deceased acquired the dwelling after 20 September 1985 and you dispose of your ownership interest in it within two years of the deceased's death.

However, this exemption only applies to a dwelling owned by the deceased. Where the dwelling is intentionally demolished and the vacant land is disposed of, no exemption is available on the disposal of the land.

Where the deceased acquired the property after 20 September 1985, the first element of the cost base and the reduced cost base is the deceased's cost base of the property on their date of death.

Your parent B acquired their interest upon the death of their spouse in mid 1998 for its market value on their date of death.

As the property is being transferred into the beneficiaries' names within two years of your parent A's death, any capital gain or capital loss is disregarded at this time.

Demolition of dwelling

CGT event C1 happens if a CGT asset a taxpayer owns is lost or destroyed. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property.

Therefore, on the demolition of the dwelling CGT event C1 will happen. The timing of this event is when the destruction occurred if no compensation is received.

You make a capital gain from CGT event C1 if the capital proceeds from the loss or destruction 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.

Capital proceeds

If no compensation or other income is received on the demolition of a dwelling then the capital proceeds are nil. Further, the market value substitution rule does not apply to CGT event C1.

Cost base

Where a CGT event happens to only part of an asset, an individual is required to apportion the cost base and reduced cost base between the land and the dwelling using the apportionment rules. Where no capital proceeds are received, the combined effect of these rules is that no amount is apportioned to the cost base and reduced cost base of the dwelling. The entire cost base relates to the land.

An exception to the application of these apportionment rules provides that an amount that forms part of the cost base or reduced cost base of an asset is not apportioned if, on the facts, that amount is 'wholly attributable' to the part to which the CGT event happened or to the remaining part.

Where no amount is 'wholly attributable' to the acquisition of the dwelling the cost base attributed to the dwelling is nil, as the capital proceeds from the demolition will be nil no capital gain or capital loss is made on the demolition.

If any capital gain or capital loss was made it would be disregarded as the dwelling was disposed of within two years of the deceased death, and it was the deceased main residence before they died.

Subdivision of Land:

The subdivision of land is not a CGT event. For CGT purposes, the land parcel will be divided into separate assets. Subdividing the land will not in itself change the ownership of the subdivided blocks. The acquisition date of those blocks will be the same as the original block (for example, if the property was received through a deceased estate the acquisition date will be the date of death of the deceased).  

Therefore, a capital gain or capital loss is not made at the time of subdivision.

Cost Base of Subdivided Blocks:

When land is subdivided, the cost base of the original asset is apportioned between the new subdivided assets. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks.

A reasonable apportionment of the cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case.

The costs of subdivision should also be apportioned between the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market value of the blocks. However, any costs solely related to one block should be attributed to that block (for example, the costs of construction and costs of connecting electricity and water to the block should be attributed solely to that block).

Transfer of ownership of subdivided blocks to beneficiaries

Each beneficiary has an equal interest in the vacant subdivided blocks.

Upon the transfer of one of the subdivided blocks into your name a CGT event A1 will occur as there will be a change of ownership in a number of interests from the other beneficiaries' names solely into your name.

As you did not incur any expenditure to acquire this interest, the first element of the cost base and reduced cost base of these interests will be its market value at the time it is transferred into your name.

Disposal of the subdivided lot

CGT event A1 will occur upon the disposal of the land and dwelling that has been subdivided.

You make a capital gain if your capital proceeds are greater than your cost base, for example, if you receive more for an asset than you paid for it. You make a capital loss if your capital proceeds are less than your reduced cost base.

You can use the discount method to calculate your capital gain if:

· you are an individual

· a CGT event happens to an asset you own

· the CGT event happened after 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose to use the indexation method.

The discount percentage is 50% for individuals.

For further information on these methods on how to calculate your capital gain or capital loss please refer to the enclosed information which has been taken from Guide to capital gains tax 2010-11 (NAT 4151-6.2011).