Edited version of your written advice

Authorisation Number: 1051372545582

Date of advice: 28 May 2018

Ruling

Subject: Subdivision of land and main residence exemption

Question

Will you be able to claim a full main residence exemption on the future subdivision and sale of the house and land?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

Siblings A,B,C and D purchased land (land) in 19XX for $XXX,XXX.

The land is approximately XX hectares in size.

The ownership interests in the land held by the siblings was as tenants in common in the following proportions:

Council zoning requirements didn’t permit the land to be subdivided into smaller lots.

The siblings held an intention to subdivide the land into five identifiable lots and engaged a registered surveyor who prepared a plan of subdivision which showed X lots consisting of X hectares.

In 19XX, Sibling B referred to as you throughout this ruling, built a house on the land, moved into the house and erected a fence around the house occupying an area of X hectares.

You have continued to live in the house and treated it as your main residence.

No other houses or buildings have been constructed on the land.

Following the passing of sibling D, Sibling’s X interest held in the land was split and distributed evenly amongst the other siblings. The certificate of title issued in 20XX indicates the new ownership interests held by the siblings as follows:

Should council zoning requirements change, you and your siblings would like to subdivide the land into X lots as per the original plan of subdivision prepared in 19XX.

You would like to continue to treat the house and adjoining land occupying an area of X hectares which is fenced as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 112-30

Reasons for decision

Summary

The subdivision of the original land into X lots will result in you having 2 post CGT interests in each subdivided block.

If you were to subdivide and sell your ownership interests in the lot containing your house, you would be entitled to a partial main residence exemption on the X% interest you acquired in 19XX, and a full main residence exemption on the X% interest you inherited 20XX. Your siblings will have disposed of their X% interest in the lot at the time of sale.

Detailed reasoning

Capital gain tax

The capital gain tax (CGT) provisions contained in part 3-1 and part 3-3 of the Income Tax Assessment Act 1997 include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

The most common capital gain tax (CGT) event is CGT event A1, which happens if you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal, or if there is no contract, when a change of ownership occurs.

Subdivision

When a CGT asset is split into 2 or more assets, such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event.

The date you acquired the subdivided blocks is the date you acquired the original parcel of land. However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis.

Change in ownership interest

Taxation Determination TD 92/148 Income Tax: capital gains: is there a disposal and an acquisition where joint owners of a block of land subdivide that land into two smaller blocks with each owning one block? (TD 92/148) provides that as a result of a transaction after subdivision, where each owner who had a 50% share of the un-subdivided land now has sole ownership of an individual block each owner is taken to have disposed of his or her interest in the subdivided block which is now owned by the other.

Main residence

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your main residence. To get the full exemption from CGT:

● the dwelling must have been your home for your entire ownership period

● you must not have used the dwelling to produce assessable income, and

● any land on which the dwelling is situated must be two hectares or less.

For main residence purposes, the ownership period of a dwelling runs from when you obtain legal ownership of it until that legal ownership ends. In general, you can only have one main residence at any one time, which will be where you are living. However, there are a number of main residence provisions that can treat a residential property as your main residence at a time when you are not actually living there as outlined below.

Land adjacent to the dwelling

The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed two hectares.

Construction of dwelling

Generally, if you build a dwelling on land you already own, the land does not qualify for an exemption until the dwelling actually becomes your main residence.

However, you can choose to treat the land as your main residence for the shorter of four years before the dwelling actually becomes your main residence or the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.

You can only make this choice if the dwelling you build becomes your main residence as soon as practicable after the work is finished and it continues to be your main residence for at least three months.

Partial main residence exemption

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption.

You calculate your capital gain using the following formula:

Capital gain x Non-main residence days

Total number of days in your ownership period

Discount method

Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied:

● you are an individual, a trust or a complying superannuation entity

● a CGT event happens to an asset you own

● the CGT event happened after 11.45am (by legal time in the ACT) on 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.

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year.

Application to your circumstances

When the original land is subdivided into X lots, with each lot being X hectares in areas, you would hold 2 separate post CGT interests in each subdivided lot.

Your two ownership interests in each lot, including the lot in which you constructed your house, would include the following:

n A post CGT X% interest acquired in 19XX

n A post CGT X% interest acquired in 20XX

The subdivision of the land into X lots does not result in a CGT event. It is only when individual interests in the lots are transferred or disposed to another person that a CGT event occurs.

Therefore, if you were to dispose of your combined X% interest in each of the X blocks to your siblings (excluding the lot on which your house is constructed), X separate CGT events would occur. Similarly, if your siblings disposed of their X% interest in the subdivided lot on which your house is located, a CGT event would occur and siblings A and C would be liable for any capital gain or loss that results in the disposal of their interests.

Alternatively, if you and your siblings retain the same ownership interests in each of the subdivided lots as you each held in the original land, there will be no CGT event. In this case, if you and your siblings were to dispose of their interest in the subdivided lot containing your house, the main residence exemption would be apply to the following ownership interests.

1. A partial exemption relating to the post CGT X% interest

If you to subdivide the lot on which your house was built and dispose of your X% interest, you would only be able to claim a partial main residence exemption for the period 4 years before you constructed and moved into the house, that is for the period 19XX to 19XX. The period from acquiring the land in 19XX to 19XX would not qualify as your main residence. You would also be able to claim a main residence in relation to your X% interest for the period from 19XX when you moved into the home until your dispose of the home.

For the post CGT X% interest held you, your partial exemption would be calculated by applying the following formula:

CG or CL amount x Non main residence days x X

Days in your ownership period X

Where CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this subdivision.

Non main residence days is the number of days in your ownership period when the dwelling was not your main residence. This would include the period from acquiring the land in 19XX to 19XX.

Days in your ownership period include the period from acquiring the dwelling in 19XX until disposing of it by sale.

You would be able to apply the 50% discount to your X% ownership interest as you have held this ownership interest for more than 12 months.

2. CGT treatment of the X% post CGT interest

If you were to subdivide and dispose of the land containing your house, you would be able to claim the full main residence for the X% CGT interest acquired in 20XX, as you inherited this interest at the time your sibling passed away.

3. CGT treatment of the X% post CGT interest held by your siblings

As your siblings own a X% interest in the subdivided lot containing your house and each of the other subdivided lots, you will not be able to claim a main residence exemption in relation to this interest. Your siblings will dispose of their X% interest when the lot containing your house is subdivided and title transferred to a third party as a result of the disposal of their interest. They will not be able to claim a main residence exemption in relation to their X% interest.

4. Land exceeding 2 hectares

The land (including the land under the dwelling) which exceeds XX hectares does not qualify as the main residence exemption and the capital proceeds on the sale of the land should be apportioned to reflect the market value of the capital proceeds relating to the X hectares. The cost base should be apportioned on a reasonable basis as well.