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Edited version of your written advice
Authorisation Number: 1012723403894
Ruling
Subject: Subdivision of main residence - dwelling to be demolished after sale
Question
Will the sale of your proposed Lot 1, without the dwelling that is your main residence, qualify for the main residence exemption?
Answer:
No
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You own a property with a dwelling as your main residence.
You obtained a planning approval to subdivide the property into two blocks, Lot 1 and Lot 2. The dwelling straddles both lots.
You intend to do in the following order: (i) enter into a contract to sell Lot 1; (ii) settle that contract; (iii) demolish the house; and (iv) build a new house on Lot 2 and live in it as a main residence.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 118-B
Income Tax Assessment Act 1997 Section 118-115
Income Tax Assessment Act 1997 Section 118-165
Reasons for decision
Subdivision of land
If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax (CGT) purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.
However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.
Main residence exemption
Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) can disregard a capital gain or capital loss that happens to a dwelling that is a main residence.
To get the full exemption from CGT:
• the dwelling must have been your home for the whole period you owned it
• you must not have used the dwelling to produce assessable income, and
• any land on which the dwelling is situated must be 2 hectares or less.
Section 118-115 of the ITAA 1997 includes a dwelling to be a unit of accommodation that is a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation.
Section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to the sale of land if the CGT event (the disposal) does not also happen in relation to the dwelling.
Taxation Determination TD 1999/73 explains land under a unit of accommodation qualifies for the main residence exemption only if the land and the unit of accommodation are sold together as a dwelling.
Application to you circumstances
In your case, you intend to retain ownership of the dwelling (as you advise that you will demolish the house) after the sale of the proposed Lot 1. Therefore, you will not be disposing of the dwelling with the land within the same CGT event (the disposal). Accordingly, the proposed sale of Lot 1 (being land not sold with a dwelling) will not qualify for the main residence exemption and any capital gain made on the sale will not be disregarded.