Edited version of private advice

Authorisation Number: 1012655048796

Ruling

Subject: Capital Gains Tax

Question 1

Will you be eligible for a 50% discount on any capital gain made on the sale of vacant land?

Answer

Yes

Question 2

Are you able to include stamp duty, loan interest, and advertising costs in the cost base of the CGT asset of vacant land?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You purchased a block of land.

You paid stamp duty on the purchase.

You have paid interest on a bank loan used to purchase the land.

You and your spouse hold the land jointly and equally.

You were unable to build on the land as planned and will now be selling it.

You will make a capital gain on the sale.

You will enter the contract for sale at least 12 months after you entered the contract for purchase.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Section 109-5 of the Income Tax Assessment Act 1997

Section 110-25 of the Income Tax Assessment Act 1997

Paragraph 110-35(5)(b) of the Income Tax Assessment Act 1997

Subdivision 115-A of the Income Tax Assessment Act 1997

Section 115-25 of the Income Tax Assessment Act 1997

Section 115-100 of the Income Tax Assessment Act 1997

Reasons for decision

You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

A capital gain or capital loss may arise if a CGT event happens to a CGT asset. A CGT asset is any kind of property, or a legal or equitable right that is not property.

Under section 104-10 of the ITAA 1997, the disposal of a CGT asset causes a CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from you to another entity. According to subsection 104-10(3) of the ITAA 1997, the time of the event is when you enter into the contract for the disposal. Under section 109-5 of the ITAA 1997 the time of acquisition is also the date of contract for an A1 event.

Calculating capital gains and losses

You make a capital gain if the capital proceeds from the disposal of the asset are more than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's reduced cost base. Capital gains are taxed at the rate that applies as a result of the level of your other taxable income plus your net capital gain.

Cost base

The cost base of a CGT asset consists of five elements that are detailed in section 110-25 of the ITAA 1997.

Under subsection 110-25(4) of the ITAA 1997, the third element of cost base is the costs of owning the CGT asset and can include interest on money you borrowed to acquire the asset, rates, land tax, and costs of maintaining the asset.

Subsection 110-35(4) of the ITAA 1997 provides that stamp duty is an incidental cost and included within the second element of cost base. Paragraph 110-35(5)(b) provides that the costs of advertising or marketing to find a buyer are incidental costs that also fall within the second element of cost base.

In your case, you paid stamp duty when you acquired the CGT asset. You also incurred interest expenses on the money borrowed to acquire the asset. This expense is not deductible under any other provisions of the ITAA 1997. You expect to advertise the land for sale in attempts to find a buyer. The expenses of stamp duty, interest, and advertising will form part of your cost base.

Discount capital gain

Under subdivision 115-A of the ITAA 1997 an individual who makes a capital gain from a capital gains tax (CGT) event happening after 21 September 1999 may be eligible for a discount capital gain. In addition to this the cost base may not be indexed and the discount only applies to certain CGT events.

In your case, CGT event A1 will occur when you dispose of the asset by sale. This is not an event that is excluded by section 115-25 of the ITAA 1997. Given you acquired the asset by an A1 event, the date of acquisition is the date you entered the contract to purchase the land. Consequently, when you enter a contract to sell the land at least 12 months after this date you will have held the asset for at least 12 months and you will have a discount capital gain.

Section 115-100 of the ITAA 1997 provides that the discount percentage will be 50% if the gain is made by an individual and neither section 115-105 nor 115-110 (about foreign or temporary residents) applies to the gain.

In your case, you will make the gain as an individual and neither of the abovementioned sections applies. Accordingly, you will be eligible for a 50% discount capital gain.