Edited version of private advice

Authorisation Number: 1051610400304

Date of advice: 18 November 2019

Ruling

Subject: Capital gains tax - loss or destruction of CGT asset

Question 1

Are the land and buildings considered as separate CGT assets under section 108-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Did capital gains tax event C1 happen to the property or any part of the property, due to the fire?

Answer

Yes

Question 3

Do you satisfy the rollover conditions in Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

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 own a property.

You purchased this property post 20 September 1985.

You used this property as a rental property.

The building was lost to fire.

The insurer obtained a property assessor to look at the property. The assessor found that the building was not financially or practicably viable to repair and therefore recommended demolition inclusive of concrete floor slab.

You lodged an insurance claim and received the amount to cover the building, contents and lost rent.

The building is not covered by the balancing adjustment provisions and was not constructed on land acquired before 20 September 1985.

A property was purchased in 2018. You intend for this property to be your replacement asset.

This asset was purchased by the Trustee of a Trust.

The Trust is a discretionary trust.

You are the first principal beneficiary of the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-55

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 112-30

Income Tax Assessment Act 1997 section 116-20.

Income Tax Assessment Act 1997 section 124-75

Reasons for decision

Summary

The land and building are considered to be one asset. When the fire occurred, the house was destroyed and CGT event C1 occurred to part of the asset.

Detailed reasoning

Separate Assets

Section 108-5 of the ITAA 1997 provides that land and buildings are Capital Gains Tax (CGT) assets.

Generally, it is viewed that what is attached to land is part of the land. That is, the land and what is attached is considered one asset. However, for CGT purposes, there are exceptions to this rule which may treat the land and what is attached to it as separate assets. Where this is the case:

·        any capital gain or loss must be determined separately for each asset, and

·        depending on the date of acquisition of each asset, it may not be possible to apply the CGT discount to both assets.

For CGT purposes, the exceptions to the rule that what is attached to the land is part of the land are considered in Subdivision 108-D of the ITAA 1997.

Subsection 108-55(1) of the ITAA 1997 states that any buildings or structures on land acquired on or after 20 September 1985 will be a separate CGT asset if the balancing adjustment provisions specified in Subdivision 40-D of the ITAA 1997 apply to the building or structure.

Broadly, a building will be treated as a separate asset from the land to which it is affixed if the building is a depreciating asset for which a balancing adjustment must be worked out on sale, or the building is a post CGT asset and the land to which it is attached is a pre CGT asset that was acquired before 20 September 1985.

Section 108-60 of the ITAA 1997 provides that a depreciating asset that is part of a building or structure is taken to be a separate CGT asset from the building or structure.

Subsection 108-5(2) of the ITAA 1997 provides that a CGT asset also includes part of, or an interest in, a CGT asset, including land and buildings.

Application to your situation

The balancing adjustment provisions do not apply and the building was not constructed on land acquired before 20 September 1985. Therefore the building and land will be treated as a single CGT asset.

CGT event C1

In terms of section 104-20 of the ITAA 1997, CGT event C1 happens if a CGT asset you own is lost or destroyed. The timing of the event is when you first receive compensation for the loss or destruction. An insurance payout would constitute compensation. You make a capital gain if the compensation is more than the asset's cost base.

In your case a C1 CGT event happened when you received an insurance payout in relation to the destruction of your building. This is because your building was completely destroyed according to the property assessor's report.

You will make a capital gain if the capital proceeds received by you are more than the asset's cost base. You will make a capital loss if those capital proceeds are less than the asset's reduced cost base.

As CGT event C1 happened to only part of your asset, you are required to apportion the cost base and reduced cost base between the land and the destroyed building using the apportionment rules in subsection 112-30(2), (3) and (4) of the ITAA 1997.

Replacement asset rollover

If your capital gains tax asset is lost, destroyed or compulsorily acquired, you may receive money or another CGT asset (or both) as compensation. In this case, you can choose to:

·        defer your liability to pay tax on any capital gain arising on the disposal, or

·        get a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

This concession is known as a rollover.

This rollover is available if all or part of your CGT asset is lost or destroyed. If you receive money as compensation, for the rollover to be available you must incur expenditure on repairing the CGT asset, or acquiring another CGT asset, within a certain period.

Application to your circumstances

The rollover requires the same entity who owned the destroyed asset to acquire the replacement asset. In your circumstances, the discretionary trust is the owner of the replacement asset, which is different to the destroyed property which you owned in your individual capacity.

Therefore you cannot access the rollover to defer your capital gains liability.