Edited version of private advice

Authorisation Number: 1051850107266

Date of advice: 19 August 2021

Ruling

Subject: Capital gains tax

Question

Are you eligible for an exemption from capital gains tax in relation to the sale of the property?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away.

The property was the deceased's main residence since purchase,

The property was purchased prior to the 20 September 1985.

Probate was granted in the same year the deceased passed away.

A clause of the Will required that the property be subdivided and provided the manner in which the subdivided property would be distributed to the beneficiaries.

The subdivision process commenced in the same year.

In total there were several Development Applications lodged with the Council.

Due to the property being located in a conservation area, you were required to address various compliance issues prior to Council approval.

These include, but are not limited to:

•         preliminary site investigation (PSI),

•         site contamination and remediation,

•         scientific testing,

•         soil sampling and laboratory analysis,

•         concept plans for stormwater drainage and removal of redundant pipelines,

•         plans covering the effect of construction on local trees.

The Council requested that the first application be withdrawn subject to a PSI to determine the history of the site.

A year after gaining Probate you obtained the services of an environmental scientist to carry out the PSI.

The PSI confirmed that there was no history of industrial activity on the site.

The recommendation based on the reports was to remediate the rear of the intended subdivided portion, retain the existing shed on this portion and utilise a "cap and contain/site management plan" report for the existing soil beneath the shed.

You were advised by the environmental scientist that it would be a Class 2 remediation and Council approval was not required.

Remediation of the rear intended subdivided portion of the site was carried out by the builder and the shed at the rear of the property was retained.

The "cap and contain/site management plan" report was rejected by the Council and you were advised that retention of the shed needed approval by a council lawyer.

You had a meeting with two town planners from the Council along with the builder during which you were advised that a detailed site investigation would be required for the whole property, not just the rear portion, and that the shed would need to be demolished.

You sought advice from an environmental and planning lawyer who advised you to retain the services of a professional town planner.

You engaged a town planner to manage the subdivision who oversaw the process until Council approval a few years later.

In the following year an application was rejected with several issues being raised:

•         the partial contamination of the property,

•         a Stage two detailed site investigation would be required to address the contamination,

•         the Stage two detailed site investigation report would have to state that the land is suitable for its intended land use or that remedial works would be required to meet the relevant health based investigation level.

In addition to the Development application, you were required to obtain a Council and roadworks permit for the construction of a concrete vehicle crossing and reconstruction of the sandstone kerb and concrete gutter and asphalt footpath for part of the frontage of the site. The permit and associated works were a perquisite for the approval of the development application.

You received Council approval.

You subsequently lodged an additional three application for modifications to the existing approval.

The modifications included a schedule of errors and the removal of several requirements that had been included by the Council.

The rear block of the property was sold.

The rear block was sold separately to the front block of the property which had the dwelling of the deceased situated on it.

The rear block was vacant land which had no dwelling.

The entire property, being both blocks, has not been used for income producing purposes.

The total area of the property, being both blocks, is less than X hectares.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Main residence exemption and land adjacent to your dwelling

Capital gains tax (CGT) is tax you pay when a CGT event happens to a CGT asset, such as land. The most common CGT event is CGT event A1, which occurs when you dispose of your ownership interest in a CGT asset to another party, such as when you sell the land (section 104-10 of the Income Tax Assessment Act 1997 (ITAA) 1997).

Generally, you can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence (section 118-110 of the ITAA 1997).

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 2 hectares (section 118-120 of the ITAA 1997).

If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the exemption extends to the adjacent land. However, if you dispose of adjacent land at a different time than you dispose of your main residence, the exemption does not apply to the adjacent land (section 118-165 of the ITAA 1997).

If your main residence is accidentally destroyed and you then dispose of the vacant land on which it was built, you can choose to apply the main residence exemption as if the dwelling had not been destroyed and continued to be your main residence (section 118-160 of the ITAA 1997).

Application to your situation

In your case, the property had been subdivided, with the deceased's main residence dwelling located on Lot 1 (the front block), and Lot 2 (the rear block) being a vacant block of land.

A contract for the sale of the rear block was sold.

CGT event A1 occurred when you disposed of the rear block. However, this CGT event did not happen to the front block on which the deceased's main residence was located. As the two lots were not sold under the same contract, the vacant block of land cannot be viewed as being disposed of with a dwelling.

Also, as no existing dwelling had been destroyed on the rear block, you are not eligible for the exemption to disregard any capital gain made on the disposal of the rear block under section 118-160 of the ITAA 1997.

It is the Commissioner's view that you are not entitled to any exemptions or exceptions in relation to the disposal of the vacant block of land. Therefore, you cannot disregard the capital gain made on the disposal of the rear block.

Commissioner's discretion under section 118-195 of the ITAA 1997

In certain circumstances, section 118-195 of the ITAA 1997 provides that the trustee of a deceased estate may disregard an assessable gain or loss made from the disposal of a dwelling that passed to them in their capacity as trustee of a deceased estate.

In relation to dwellings acquired by a deceased person before 20 September 1985, but who passed away after that date, one of the circumstances for the exemption under section 118-195 of the ITAA 1997 to apply is that the dwelling needs to be disposed of by the trustee within two years of the date of death or within a longer period allowed by the Commissioner.

Application of the Commissioner's discretion to your situation

In your case, the rear block of the subdivided property, being a vacant lot, was sold and settled.

As the rear block was vacant land and no existing dwelling had been destroyed, then no main residence exemption will apply and you are not eligible for this exemption to disregard any capital gain made on the disposal of the rear block under section 118-195 of the ITAA 1997. The Commissioner has no ability to exercise the discretion in this situation.

Therefore, you cannot disregard the capital gain made on the disposal of the rear block.

Further issues for you to consider

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

If you acquire a dwelling the deceased had owned, and the dwelling passes to you after 20 August 1996, and it was the main residence of the deceased immediately before they passed away, the first element of the cost base of the dwelling is its market value at the date the deceased passed away.

If a taxpayer 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.

Taxation Determination TD 97/3 provides that the Commissioner will accept any "reasonable" method of apportioning the original cost base between the new blocks.

A reasonable apportionment of the cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case.

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, if a dwelling existed on an original block of land before it was subdivided into two blocks, the cost of the dwelling would only be included in the cost base of the block on which the dwelling stands.

If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks.

If the conditions for the 50% CGT discount as outlined in Division 115 of the ITAA 1997 are met, you will be entitled to reduce the capital gain made on the disposal of the rear block by 50% when determining the net capital gain made in relation to the disposal of the rear block.