Edited version of your written advice

Authorisation Number: 1012881914750

Date of advice: 21 September 2015

Ruling

Subject: Capital gains tax - subdivision - market value - capital loss

Question

Did you acquire your original interest in the dwelling when you signed the purchase contract?

Answer

Yes.

Question

Will the capital gains tax (CGT) provisions apply to you when unit Z is subsequently sold by your sibling?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts

You and your sibling, (Sibling) purchased a dwelling (dwelling) as tenants in common.

The contract was entered into in 20XX.

Settlement of the contract occurred a short time later.

The dwelling was not subject to an existing tenancy and you obtained vacant possession.

You lodged a development plan to subdivide the original block into separate allotments.

You demolished the existing dwelling and will construct a number of dwellings on the now subdivided blocks.

You had planned for the new titles in the subdivision to record that you had 100 percent interest in Lot Y and your sibling 100 percent interest in Lot Z

You sought finance to fund the construction of the dwellings.

You were unable to obtain finance based on this ownership and as a result the ownership interests were altered, so that your sibling has 100 percent interest in Lot Z and your sibling owns 50 percent and you own 50 percent in Lot Y.

New titles issued after a period of time.

A stamp duties notice of assessment issued in relation to the transfer of your interest in Lot Y to your sibling.

The dwellings are not yet completed.

You do not have an agreement with your sibling which holds that your interest in either unit Z or unit Y, are different to your legal interest.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 116-10(2)

Income Tax Assessment Act 1997 Subsection 116-30(1)

Income Tax Assessment Act 1997 Subsection 116-30(2)

Income Tax Assessment Act 1997 Section 110-25.

Reasons for decision

Question 1

Summary

You acquired your original interest in the dwelling when you signed the purchase contract.

Detailed reasoning

The capital gains provisions consider how you become the owner of a CGT asset before choosing a mechanism for determining your date of acquisition.

In your case, you have acquired your original interest in the property from an independent third party by way of contract. CGT event A1 would have happened to them when they sold it to you.

The acquisition date for capital gains purposes where a CGT asset is acquired under a contract is when you entered into the purchase contract.

Question 2

Summary

The capital gains tax provisions will not apply to you when unit Z is subsequently sold by your sibling because you have already transferred your interest to your sibling.

Detailed reasoning

Capital gains tax (CGT) events

You make a capital gain or capital loss if and only if a CGT event happens to a CGT asset that you own.

CGT event A1 will happen when an individual disposes of a CGT asset. The time of the event is when the taxpayer enters into the contract for the disposal or if there is no contract, when a change of ownership occurs.

Subdivision

If an individual subdivides a block of land, each block that results is registered with a separate title. For 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 capital loss at the time of subdivision.

Apportionment of cost base

Where an original portion of land is subdivided the original cost base must be apportioned between the new 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 for example on an area basis or relative market value basis.

However, expenditure forming part of the cost base of the asset is not apportioned if that amount is wholly attributable to a particular asset. For example, the cost of connecting water, gas and/or electricity to one of the blocks would not be apportioned over all the blocks, as it is wholly attributable to that individual block.

Change of ownership

If as a result of the transaction whereby joint owners each now have sole ownership of an individual block, each owner is taken to have disposed of their interest in the subdivided block which is now owned by the other. There have been corresponding acquisitions by each owner from the other of that interest in land now owned by each of them which was previously owned by the other. CGT event A1 has occurred. The change of ownership for you occurred when you transferred your ownership in unit Z to your sibling.

Market value substitution rule

Section 112-20 of the ITAA 1997 provides that if you receive nothing in exchange for a CGT asset you are taken to have received the market value of the asset at the time of the CGT event. You may also be taken to have received the market value if your capital proceeds are more or less than the market value of the CGT asset, and you and the purchaser were not dealing with each other at arms length in connection with the event. 

You are said to be dealing at arms length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but the quality of the bargaining between them.

Application to your circumstances

The subdivision of the original asset will not be a CGT event.

However, after the subdivision and the new titles were issued, you no longer owned a share in unit Z. CGT event A1 occurred for you and there will be a capital gain or loss for you.

The cost base of the original block will be apportioned over the new blocks. Any expenditure wholly attributable to one block will be included in the cost base of that block only.

As no money changed hands and the transaction will not be at arms length the transaction will be deemed to be at market value.

You have already transferred your interest in unit Z to your sibling. Your capital gains responsibilities in relation to unit Z ended with this transfer.