Edited version of your written advice

Authorisation Number: 1012894325161

Date of advice: 14 October 2015

Ruling

Subject: Capital gains tax

Questions and answers

1. Does a capital gain or loss arise on the disposal of the land?

Yes

2. Did a capital gain or loss arise when you received compensation for the loss of the dwelling?

Yes

3. Do the compensation payments reduce the cost base when calculating your capital gain or loss on the land?

No

4. Are you able to include in the calculation of the cost base of the land holding costs associated with the land?

Yes.

5. Are you eligible for the 50% discount when calculating your capital gain?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

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.

You purchased a block of land post 1985.

You built a dwelling on the land a number of years later.

Your dwelling was destroyed.

The dwelling was never rented out and never used to produce income.

You received compensation payments for the destroyed dwelling for the building and contents.

You did not rebuild the dwelling on the land.

You sold the land in the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Section 11-25.

Reasons for decision

You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss.

You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it. You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it.

Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate.

Loss of dwelling and contents

CGT event C1 happens if a CGT asset (or part of a CGT asset) is lost or destroyed (subsection 104-20(1) of the ITAA 1997). When an asset is lost or destroyed and you receive compensation, the time of the CGT event is when you first receive the compensation. If no compensation is received, the event occurs when the loss is discovered or the destruction occurred (subsection 104-20(2) of the ITAA 1997).

A capital gain arises if the capital proceeds from the loss or destruction are more than the asset's cost base. A capital loss arises if the capital proceeds from the loss or destruction are less than the asset's reduced cost base (subsection 104-20(3) of the ITAA 1997).

Insurance payouts received for destroyed or damaged items you used solely for your personal use, for example household goods are not ordinary income. However, the payout may need to be taken into account for capital gains tax purposes.

If a personal-use asset that was destroyed cost you more than $10,000 (or $500 if the property was a collectable such as a painting or jewellery), you will need to subtract the cost base from your insurance payout to work out whether you had a capital gain.

Capital losses on personal-use assets are disregarded, but you can make a capital loss on a collectable acquired for more than $500. These losses can only be used to reduce capital gains from collectables.

In your case you received compensation payments in relation to the destruction of your dwelling. This means that there was a CGT event C1 for the dwelling in XXXX and any capital gain or loss should have been returned in your assessment for the financial year ended 30 June XXXX. The payment in XXXX will have triggered CGT event C1 for each of the contents you were paid compensation.

If any of the assets covered under your contents insurance had a cost base of more than $10,000, or $500 for collectables, they will have to be accounted for under the CGT provisions. For those assets not meeting those requirements, any capital gain or capital loss made from the receipt of the insurance payment are disregarded.

Sale of land:

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, happened when you sold your land.

Cost base:

The cost base of a CGT asset is generally the cost of the asset when a taxpayer bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

In order to work out how much a taxpayer's capital gain or capital loss is, a taxpayer must first establish the cost base or reduced cost base of a taxpayer's ownership interest in the property.

Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements.

1. Money you paid for the asset.

2. Incidental costs of acquiring the blocks, they are:

- Fees paid to a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can only include the cost of advice concerning the operation of the tax law as an incidental cost if the advice was provided by a recognised tax adviser)

- costs of transfer

- stamp duty or other similar duty

- costs of advertising or marketing (but not entertainment) to find a buyer

- costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss

- search fees (such as fees to check land titles and similar fees

- the cost of a conveyancing kit (or a similar cost), and

- borrowing expenses (such as loan application fees and mortgage discharge fees).

Note: You do not include costs if you

- have claimed a tax deduction for them in any year, or

- omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

3. Costs of owning the asset including:

- rates, land taxes, repairs and insurance premiums

- non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an assets value.

Note: You do not include costs if you:

- have claimed a tax deduction for them in any year, or

- omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

4. Capital costs to increase or preserve the value of your asset or install or move it, such as:

- costs of applying for zoning changes

- costs of demolition and

- construction costs.

5. Capital costs of preserving or defending your ownership of or rights to your asset.

Note some of these costs will have related to both the land and the dwelling only the part of any expense that relates to the land can be included in the cost base of the land.

CGT 50% discount method

A 50% discount may be applied to a discount capital gain realised by an individual.

In order to be considered a discount capital gain, the asset that gave rise to the capital gain must have been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997).

You have held the land for more than 12 months, you are eligible for the 50% discount.

You need to subtract the cost base from the capital proceeds then reduce the amount by 50% to get your capital gain which will then be taxed at your marginal tax rate.