Edited version of private advice

Authorisation Number: 1051660648076

Date of advice: 17 April 2020

Ruling

Subject: Capital gains tax

Question 1

Is the capital gain on the disposal of your main residence on lot A disregarded?

Answer

Yes.

Question 2

Does the capital gain on the disposal of lots B and C form part of your assessable income in the 2018-19 income year?

Answer

Yes.

Question 3

Does the additional amount, relating to your capital gains tax liability, form part of the capital proceeds for the sale of lots B and C?

Answer

Yes.

Question 4

Are you entitled to the 50% CGT discount on your capital gains?

Answer

Yes.

Question 5

Are the capital proceeds and cost base apportioned on a reasonable basis when calculating the capital gain on lots B and C?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2019

Years ending 30 June 2020

The scheme commenced on

1 July 2018

Relevant facts

Entity A and entity B (you) purchased a house and land several years ago. The property is less than two hectares.

You have lived on the property since purchase.

On xx/xx/xxxx you entered into a contract to sell your house and land for $xxxx with settlement being on xx/xx/xxxx.

Under the contract you granted access and gave permission to the purchaser to develop a specific portion of the property before property settlement. It was also agreed that the purchaser in exchange for granted permission pay you X instalment progress payments before property settlement.

You were able to stay in your house until final settlement.

The purchaser wanted to subdivide the land.

On xx/xx/xxxx, an Addendum to the Contract was added in which it was agreed that prior to settlement the property would be subdivided. The new block with the house was to be approximately x,xxx square metres with the remaining land of x,xxx square metres being subject to capital gains tax.

In the addendum it was agreed that the purchaser would pay any extra capital gains tax obligations that resulted from the subdivision.

All costs in relation to the land division are to be met by the purchaser.

In xx/xx/xxxx it was agreed that you were to be paid a non-refundable deposit of $xxx,xxx.

On xx/xx/xxxx, there was a further Addendum to the Contract as a redesignation of lots was agreed to. The house was situated on lot A with the other lots being B and C.

Under the redesignation of lots, the lot with the house was smaller than under the previous subdivision plan.

The purchaser agreed to pay the capital gains tax that resulted from the redesignation of allotments.

You did not have a valuation given to you. After discussions with the purchaser's accountant, the purchaser agreed to have an independent market valuation completed for the house and land component.

The valuation of the house and land lot provided on xx/xx/xxxx was $xxx,xxx to $ xxx,xxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Division 115

Reasons for decision

Capital gains tax provisions

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens.

Under section 104-10 of the ITAA 1997, CGT event A1 happens when 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 the change of ownership occurs.

You will make a capital gain if the capital proceeds from the disposal of a property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base.

Subdivision of property

As outlined in section 112-25 of the ITAA 1997, the subdivision of land itself does not constitute a CGT event as there is no change of ownership. It is at the time of the disposal that any capital gain or capital loss may arise.

Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets. Therefore, the subdivided blocks will retain the acquisition date of the original property (Taxation Determination TD 2000/10).

The cost base of the original property will be apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks.

Although the subdivision of your land is not a CGT event, it will mean that you now have more than one CGT asset.

Main residence exemption

Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss by an individual from a CGT event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period.

In your case, any capital gain made on the disposal of your main residence on lot A is disregarded.

However, as lots B and C are separate CGT assets and do not contain your main residence dwelling, any associated capital gain is not disregarded under Subdivision 118-B of the ITAA 1997.

CGT liability payment

As outlined in paragraphs 3 and 27 of Taxation Ruling TR 95/35, a taxation adjustment is any additional amount of compensation (for example, a 'top-up') calculated to cover any income tax liability (including CGT) that may arise in respect of the compensation receipt. This amount may be determined and received at the time of the compensation receipt or at any other time. Taxation adjustments are considered to be additional amounts received as a result of or in respect of the disposal of an asset.

Although TR 95/35 discusses compensation receipts, the above principles remain relevant in your circumstances.

Applying the underlying asset approach as outlined in TR 95/35 and TR 1999/19 means that the most relevant asset in your case is the sale of the real estate rather than a separate contractual or other right.

Therefore the additional amount to be paid that relates to your CGT liability is considered to be additional capital proceeds for the CGT event A1 for the disposal of your real estate.

Section 116-20 of the ITAA 1997 supports this and states that the capital proceeds from a CGT event includes the money you have received or are entitled to receive, in respect of the event happening.

CGT discount

A discount capital gain applies if certain conditions are met under Division 115 of the ITAA 1997. Section 115-5 of the ITAA 1997 states a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

Your CGT event A1 happened in the xxxx-xx income year. As you acquired the property more than 12 months before the CGT event and meet the other conditions of Division 115 of the 1997, you are entitled to a 50% discount capital gain.

Apportioning cost base and capital proceeds

As outlined above and in TD 97/3, the cost base of the original property is apportioned between the subdivided blocks on a reasonable basis.

In your case it is reasonable that the land containing the house is of higher value than the other vacant blocks. Therefore the market value of your main residence lot is relevant in calculating the relevant cost base and capital proceeds.

Therefore where the market value of the main residence lot is xx% of the total lots, it is reasonable to use this percentage when calculating the relevant cost base and capital proceeds of the relevant lots.

However where there are capital improvements done to the house or other elements of the cost base that relate specifically to your main residence and not to the other blocks, then such costs may need to be allocated differently as apportioning the costs on the percentage as determined under the valuation may not be relevant.

Similarly, as the additional capital proceeds for your CGT liability only relate to lots B and C, it is reasonable to allocate these additional capital proceeds to these lots.