Edited version of your private ruling

Authorisation Number: 1012597132391

Ruling

Subject: Capital gains tax - deceased estate, demolition and subdivision

Question 1:

Will a capital gains tax (CGT) event occur when you transferred your interest in block A to your sibling?

Answer:

Yes

Question 2:

Will a CGT event occur when your sibling transferred an interest in a block B to you?

Answer:

Yes.

Question 3:

Will a CGT event occur when you transfer your interest in block B to your family trust?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2013

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.

More than five years ago you and your sibling inherited an equal share in the family home when your parent died.

The family home has been demolished.

You and your sibling did not receive any proceeds from the demolition of the dwelling.

You and sibling are going to subdivide the land into a number of blocks and construct a dwelling on each block.

The dwellings will be used for income producing purposes.

You and your sibling will transfer two of the subdivided block into the following names:

• one to your sibling (block A), and

• one to yourself (block B).

The other remaining block (block C) will remain in joint names of you and your sibling.

You are going to transfer block B into your family trust, which you are your spouse are beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 103-05

Income Tax Assessment Act 1997 Section 103-10

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104 -40

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 128-15

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 is CGT event A1, which happens when you dispose of a CGT asset. The time of the event is when you enter into the contract for its disposal or if there is no contract when a change of ownership occurs.

A capital gain or a capital loss is made if a CGT event happens to a CGT asset. You make a capital gain when the capital proceeds are greater than the cost base. You make capital loss when the reduced cost base is greater than the capital proceeds.

Assets acquired from a deceased estate

Special rules apply when an asset owned by a person just before they die passes to their legal personal representative (LPR) or to a beneficiary in their estate.

Regardless of the actual date that the legal title to the property passes, for CGT purposes a LPR or beneficiary is considered to have acquired the asset on the deceased's date of death.

In your case, you are taken to have acquired your 50% interest in your family home on your parent's date of death.

If you acquire a dwelling which was the deceased main residence, there are special rules for calculating your cost base.

Any capital gain or capital loss you make from a CGT event that happens to a dwelling that has passed to you as LPR or beneficiary of a deceased estate is disregarded if you meet a number of conditions. One of these conditions is that you dispose of your ownership interest in the dwelling within two years of the deceased's death.

The first element of the cost base and reduced cost base of a dwelling is its market value on the deceased date of death when the dwelling passed to you after 20 August 1996, and it was the main residence of the deceased immediately before their death and was not being used to produce assessable income at that date.

Where the market value of an asset needs to be determined, you can either obtain a detailed valuation from a qualified valuer or compute your own valuation based on reasonably objective and supportable data.

Demolition of dwelling

CGT event C1 happens if a CGT asset you own 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 an individual might demolish a dwelling in the course of redeveloping a property.

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

You make a capital from CGT event C1 happening if any capital proceeds you received from the demolition of the dwelling are greater than the cost base of that part of the CGT asset represented by the dwelling. You will make a capital loss if the proceeds are less than the reduced cost base.

Capital proceeds

For most CGT events, your capital proceeds are an amount of money or the value of any property you receive (or entitled to receive).

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

Cost base

Where a CGT event happens to only part of an asset, you are 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 the 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.

In your case, you and your sibling received no capital proceeds from the demolition of the dwelling. Therefore, the effect of this is that no cost base is apportioned to the cost base/reduced cost base of the dwelling.

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 does not change the ownership of the subdivided blocks. The acquisition date of the subdivided 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 the deceased's death. 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 subdivided assets. Taxation Determination TD 97/3 (enclosed) provides that the Commissioner will accept any reasonable method of apportioning the cost base between the new blocks, for example, on an area basis or a relative market value basis.

A reasonable apportionment of the cost of the land itself can usually be achieved on an area 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 value the Commissioner considers costs such as surveying, legal fees and application fees associated with the subdivision should be apportioned in accordance with the 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).

You and your sibling will each have a 50% ownership interest in block A, block B and block C.

Building a new house on land already owned

The building of a new house on land already owned is an improvement to the land and it is not treated as a separate asset. The capital costs of building the new houses are included in the fourth element of the property.

The fourth element is the capital costs you incurred for the purpose or the expected effect of increasing or preserving the asset's value. It also includes capital costs you incurred that relate to install or moving an asset.

Market value substitution rule

If you receive no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is subject of the event. The market value is worked out as at the time of the event.

If you do not incur any expenditure to acquire an asset, the first element of your cost base and your reduced cost base of a CGT asset you acquire from another entity is its market value at the time of acquisition.

Transfer of ownership

CGT event A1 will occur on the following:

• the transfer (disposal) of your interest in block A to your sibling, and

• the transfer of your sibling's interest in block B into your name.

Transfer of interest to your sibling

Upon the transfer of your 50% interest in block A to your sibling, you will receive a 50% share in block B as your proceeds.

Transfer of interest from your sibling

Upon the transfer of your sibling's 50% interest in block B to you, your sibling will receive a 50% interest in block A as their proceeds.

You will have two separate 50% interests in block B with two different cost bases. The cost base of the first 50% interest you acquired is the market value on your parent's date of death. The cost base of the second 50% interest you will acquire from your sibling is its market value on the date it is transferred into your name.

Transfer of property to family trust

The CGT event which is applicable in this particular case is CGT event E2. CGT event E2 occurs when an asset is transferred into an existing trust. The time of the event is when the asset is transferred.

However, there are some exceptions, which, if applicable, can mean that this CGT event will not happen. The first of these is if you are the sole beneficiary of the trust and you are absolutely entitled to the asset. The second exception occurs when you transfer the asset from one trust to another and the beneficiaries and the terms of the trust are the same in each case.

If none of these exceptions are applicable, CGT event E2 will occur, at the time of transfer.

In your case, the transfer of your ownership interest in block B into your family trust will trigger CGT event E2 as none of the exceptions apply. The time of the event will occur on the date when block B is transferred to your family trust.

As you will not receive any proceeds as a result of the transfer, you are taken to have received the market value of block B on the date it is transferred to your family trust.

You can use the discount method to calculate your capital gain if you meet all the following criteria:

• the 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.

Further information is available on our website - www.ato.gov.au.