Edited version of private advice

Authorisation Number: 1052181656484

Date of advice: 31 October 2023

Ruling

Subject: Pre-CGT asset

Question

Is any capital gain or capital loss you made on the sale of the Property disregarded pursuant to paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2023

Relevant facts and circumstances

Mr A, and his wife, purchased a property in 1975 consisting of XX acres and located at XXXXXXXX (the Property). At the time of acquisition of the Property, it included a house and sheds, and had been used as a cattle farm by the previous owner.

Mr A is a farmer, having used the Property to produce vegetables until 19XX, before using it to run a cattle farm. Prior to 20 September 1985 Mr A built a cool room on the Property to store the vegetables. No assets were built on the Property on or after 20 September 1985.

The Property was rezoned by the Council from Farming Zone to Residential 1 Zone during the income year ended 30 June 20XX.

Mr A and his wife continued to own the Property until it was sold during the income year ended 30 June 20XX, for $XXX to a third party developer. The Property was not subdivided, nor had Mr A applied for a planning permit prior to the sale of the Property.

Mr A confirmed that he is not in the business of buying and selling land.

Relevant legislative provisions

Income Tax Assessment Act 1936 former subsection 106ZZS(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 subsection 108-55(2)

Income Tax Assessment Act 1997 subsection 108-70(1)

Income Tax Assessment Act 1997 subsection 108-70(2)

Income Tax Assessment Act 1997 subsection 108-70(3)

Income Tax Assessment Act 1997 Division 149

Reasons for decision

All subsequent legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated.

Summary

The Property is a pre-CGT asset, and any capital gain or loss made on its sale will be disregarded pursuant to paragraph 104-10(5)(a)..

Detailed reasoning

A CGT asset is defined in subsection 108-5(1) as any kind of property or a legal or equitable right that is not property.

A capital gain or capital loss may arise if a CGT event happens to a CGT asset. The most common CGT event is CGT event A1 under section 104-10, and this occurs when an entity disposes of their ownership interest in a CGT asset. Where a contract for the disposal is entered into, the time of the event is when the contract is entered into (subsection 104-10(3)).

A capital gain or capital loss made from a disposal of a pre-CGT asset is disregarded (paragraph 104-10(5)(a)). Broadly, a CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having stopped being a pre-CGT asset (because majority underlying interests in the CGT asset were not had by ultimate owners who had majority underlying interests in the CGT asset immediately before 20 September 1985 - refer former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 and Division 149).

A building or structure constructed on or after 20 September 1985 on land acquired before 20 September 1985 may be taken to be a separate CGT asset from the land pursuant to subsection 108-55(2), and a capital improvement may be taken to be a separate CGT asset from the land under specific circumstances considered by subsections 108-70(1), (2) or (3).

Relevantly, Taxation Determination TD 2017/1[1] confirms that for the purpose of subsections 108-70(2) or (3), intangible capital improvements can be a separate CGT asset from the pre-CGT asset to which those improvements are made if the relevant thresholds are satisfied. By way of example, TD 2017/1 provides that where a farmer holding pre-CGT land obtains council approval to rezone and subdivide the land, those improvements may be separate CGT assets from the land.

The application of subsections 108-70(2) and (3) is set out in paragraphs 5 and 6 of TD 2017/1 as follows:

5. Subsection 108-70(2) deems a capital improvement (that is not related to another capital improvement) to be a separate CGT asset if the following conditions are met:

(a) the improvement is to a pre-CGT asset

(b) the improvement's cost base is more than the improvement threshold² for the income year in which the CGT event happened to the original asset, and

(c) the improvement's cost base is more than 5% of the capital proceeds from the event.

6. Subsection 108-70(3) operates similarly in relation to 'related' capital improvements; except that all such improvements are taken to be one, separate CGT asset. Section 108-80 outlines factors to be considered in deciding whether capital improvements are related.

Application to the circumstances

The Property is a CGT asset and CGT event A1 under section 104-10 happened to Mr A and his wife at the time they entered into a contract for the disposal of the Property.

As Mr A and his wife purchased the Property prior to 20 September 1985, and continued to own the Property until its disposal to the developer (such that majority underlying interests in it did not change at any time until its disposal), the Property did not stop being a pre-CGT asset prior to its disposal.

Whilst the rezoning of the Property from Farming Zone to Residential 1 Zone by the Council during the income year ended 30 June 20XX could (in theory) constitute an intangible capital improvement to a pre-CGT asset and be taken to be a separate CGT asset from the Property (under subsection 108-70(2)), that is also subject to satisfaction of the relevant threshold requirements (set out in paragraphs 5(b) and (c) of TD 2017/1). Given the rezoning of the Property was initiated by the Council rather than by Mr A, Mr A will have no cost base for the deemed separate intangible CGT asset, such that it will not satisfy those relevant improvement threshold requirements.

Conclusion

The Property is a pre-CGT asset and no separate CGT asset has resulted from the rezoning of the Property by the Council. Any capital gain or capital loss made on the sale of the Property will be disregarded in accordance with paragraph 104-10(5)(a).

[1] Income tax: capital gains: can intangible capital improvements made to a pre-CGT asset be a separate asset for the purpose of subsections 108-70(2) or (3) of the Income Tax Assessment Act 1997?