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Ruling
Subject: Capital gains tax
Question 1
Are you entitled to fully disregard any capital gain made on disposal of the vacant lot due to the main residence capital gains tax exemption?
Answer
No.
Question 2
Is the acquisition date of the vacant lot considered to be the date of the deceased's death?
Answer
Yes.
Question 3
Is the first element of the cost base of the vacant lot considered to be the market value of the property at the date of the deceased's death?
Answer
Yes.
Question 4
Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period to the 2013-14 financial year?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The deceased died in 2011.
The deceased had a main residence at the time of death.
The property was purchased by the deceased and their spouse prior to 20 September 1985.
After consultation with real estate agents, the property was placed on the market as a single lot in 2011. No offers to purchase the property were received over the period to mid 2012. The agents attributed the lack of offers to the downturn in the property market.
After further consultation with the real estate agents, a decision was made to subdivide the property into two lots (house lot and vacant lot). The property remained on the market during this time.
Work commenced on the subdivision process. Marketing of the property as two lots commenced in late 2012.
An offer to purchase the house lot was received in late 2012. This is now an unconditional contract. Settlement is scheduled shortly after issue of title for the two lots.
An offer to purchase the vacant lot was received in early 2013. However, the purchaser notified the real estate agent of their decision to not proceed with the offer for financial reasons.
Titles for the two lots have not issued. They are expected to issue by mid 2013. The lengthy process in obtaining title for the two blocks can be attributed to:
· Delays due to the sub division approval processes extending through the 2012/13 Christmas holiday period;
· Delays outside your control in completion of works such as sewer connection, water connection and tradesman activities.
The real estate agent advises that the land may require a further 12 months to sell.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 118-110 (1).
Income Tax Assessment Act 1997 Section 118-120.
Income Tax Assessment Act 1997 Section 118-165.
Income Tax Assessment Act 1997 Subsection 118-195(1).
Reasons for decision
Main residence exemption
The main residence exemption in Subdivision 118-B of the ITAA 1997 applies to a capital gain or capital loss from a CGT event that happens to a dwelling (subsection 118-110 (1) of the ITAA 1997). The exemption extends to any capital gain or loss from land adjacent to a dwelling (to a maximum area of two hectares) if the land is used primarily for private or domestic purposes (section 118-120 of the ITAA 1997). However, the exemption does not apply to land if separate CGT events happen to the land and the dwelling (section 118-165 of the ITAA 1997).
A dwelling is defined as a unit of accommodation and includes up to two hectares of adjacent land.
You are selling both the house lot with the deceased's main residence and a vacant lot which you have subdivided. As the house lot has the main residence on it, it satisfies the need for a dwelling and the main residence exemption applies. However, the vacant lot contains no dwelling to which the main residence provisions can apply. Therefore the two year rule has no application to the vacant lot.
Any capital gain or capital loss you make from the sale of the subdivided vacant lot cannot be disregarded.
As the sale of the vacant lot will be conducted by the Trustees of the deceased estate, any net capital gains are to be included in the assessable income of the deceased estate in the income year in which the sale occurs.
Cost base of subdivided land
Where land is subdivided, the original cost base of the land needs to be apportioned between the new assets on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the blocks.
A reasonable apportionment of the original cost of the land in 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. Taxation Determination TD 10 provides that where the 'market value' of an asset needs to be determined, taxpayers can choose to:
obtain a detailed valuation from a qualified valuer; or,
compute their own valuation based on reasonably objective and supportable data.
The actual 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 surveying, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks. However, any cost solely related to one block, such as connection of water or electricity, should be attributed solely to the cost of that block.
Extension of time
As per subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling (or your ownership interest in it) is disregarded if:
(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.
Beneficiary or trustee of deceased estate acquiring interest | |||
Item |
One of these items is satisfied |
And also one of these items | |
1 |
the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling was the deceased's main residence just before the deceased's death and was not then being used for the *purpose of producing assessable income |
your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner | |
........... | |||
2 |
the deceased *acquired the *ownership interest before 20 September 1985 |
the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: | |
|
|
(a) |
the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or |
|
|
(b) |
an individual who had a right to occupy the dwelling under the deceased's will; or |
|
|
(c) |
if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual |
In this case when the deceased died the property passed to the executors of the estate. The property was acquired by the deceased and their spouse prior to 1985 and it was the deceased's main residence just prior to death.
The two year time period to dispose of the property has expired. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner extends the time period.
The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:
· the ownership of a dwelling or a will is challenged,
· the complexity of a deceased estate delays the completion of administration of the estate,
· a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (e.g. the taxpayer or a family member has a severe illness or injury), or
· settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.
In determining whether or not to grant an extension the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and how long the trustee or beneficiary held it.
The property was listed on the market to sell in 2011. It hadn't sold by mid 2012 and so the decision was made to subdivide the block into two lots. This process was finalised and both lots were listed for sale in 2012. At this point, the house lot has an unconditional contract. The contract will settle once the two titles issue which is expected to take place by mid 2013.
The settlement of the house lot is delayed due to the lengthy process in obtaining title for both blocks. This delay can be attributed to matters outside your control. The contract on the vacant lot fell through due to financial reasons by the purchaser.
Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the 2 year time limit for the sale of the house lot.