Edited version of private advice

Authorisation Number: 1052253332795

Date of advice: 20 June 2024

Ruling

Subject: CGT - main residence exemption - subdivision of land

Question 1

Are you entitled to the CGT main residence exemption on disposal of the sub-divided block of land?

Answer

No.

Question 2

Can you apply the CGT 50% discount to any capital gain you make on disposal of the subdivided block of land?

Answer

Yes.

Question 3

Is the cost base of the sub-divided block of land you sold the market value on original purchase divided by X, and the value for the cost base on transfer from your ex-partner will be the market value at that time divided by Y, apportioned to take account of the different sizes of the two blocks?

Answer

Yes.

This ruling applies for the following period:

Period ending 30 June 2024

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

You were the owner of a property (the property).

In XXXX 19XX, you and your partner purchased the property for $X. You each had a 50% ownership interest in the property. Your 50% interest acquired was valued at $X.

In 20XX you and your partner separated. You were awarded your ex-partner's ownership interest in the property as part of your settlement. At the time of your separation the court valued the property at $X. The 50% ownership interest transferred to you at this was valued at $X.

The property was your main residence.

You decided to demolish the dwelling, subdivide the land into two blocks, sell one of the blocks and then build a new main residence on the remaining block.

On XX XXXX 20XX, you entered into a contract with Mr and Mrs X to sell them a portion of your land after the land was subdivided.

On XX XXXX 20XX, you had the dwelling demolished. You resided in the dwelling until its demolition.

On XX XXXX 20XX, you submitted an application for subdivision of the land.

On XX XXXX 20XX, your application for subdivision received approval.

The total size of the land before subdivision was X.

The subdivision resulted in two blocks:

•         Block A - area X being X% of the land before subdivision.

•         Block B - area X being X% of the land before subdivision.

You sold Block A to Mr and Mrs X. Contract date for the sale is XX XXXX 20XX. You have not given the settlement date.

The amount you received for the sale of Block A was $X.

Your intention is to build a new main residence on Block B.

Relevant legislative provisions

Section 118-110 Income Tax assessment Act 1997

Section 118-120 Income Tax assessment Act 1997

Section 118-165 Income Tax assessment Act 1997

Section 112-25 Income Assessment Act 1997

Subsection 112-25(1)(a) Income Assessment Act 1997

Subsection 112-25(2) Income Assessment Act 1997

Subsection 112-25(3) Income Assessment Act 1997

Reasons for decision

Issue

Capital gains tax (CGT) - main residence exemption - subdivision of land

Question 1

Are you entitled to the CGT main residence exemption on disposal of the sub-divided block of land?

Summary

You are not entitled to claim the main residence exemption on disposal of the subdivided block of land which formed part of your main residence.

Detailed reasoning

Main residence exemption

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states the capital gain or loss you make in relation to a CGT asset that is a dwelling is disregarded if certain conditions are met. These conditions are that you must be an individual, 'the dwelling was your main residence throughout your ownership period', the dwelling is situated on less than two hectares, and the dwelling did not pass to you through a deceased estate.

Section 118-120 of the ITAA 1997 specifies that the main residence exemption can extend to adjacent land where:

•         the same CGT event happens to both the land and the dwelling

•         the land was 'used primarily for private or domestic purposes in association with the dwelling'

•         the total combined area for the dwelling and adjacent land is less than two hectares.

Section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to the sale of land if the CGT event (the disposal) does not also happen in relation to the dwelling.

Subdivision of land

Section 112-25 of the ITAA 1997 states what happens when you split, change or merge assets, such as subdividing land. If you subdivide a block of land, each block that results is a new asset which is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land. The cost base of the original land is divided between the subdivided blocks on a reasonable basis.

Where subdivided land is sold separately from the main residence, the main residence exemption will not apply to that land.

Application to your circumstances

In your case, you have shown the dwelling was your main residence throughout your ownership period and was not used for investment purposes. You have demolished the dwelling and subdivided the block resulting in two allotments on separate titles. This was done with the intention of selling one block of land and building a new main residence on the remaining block. The main residence exemption will only apply to the block that contains the proposed new dwelling. The sale of the second block will be subject to capital gains tax. Any capital gain that arises on the disposal of that block would be included in your assessable income.

Question 2

Can you apply the CGT 50% discount to any capital gain you make on disposal of the subdivided block of land?

Summary

As you held the land for more than 12 months, you are entitled to apply to CGT 50% discount to the capital gain you made after applying any capital losses (including losses from earlier years).

Detailed reasoning

Claiming the CGT 50% discount

For an asset to qualify for the CGT discount you must own it for at least 12 months before the CGT event happens. The CGT event is the point at which you make a capital gain or loss. You exclude the day of acquisition and the day of the CGT event when working out if you owned the CGT asset for at least 12 months before the CGT event happens.

Application to your circumstances

Because you owned the land for more than 12 months you are able to discount your capital gain using the 50% discount method after applying any capital losses (including losses from earlier years).

Question 3

Is the cost base of the sub-divided block of land you sold the market value on original purchase divided by 2, and the value for the cost base on transfer from your ex-partner will be the market value at that time divided by 2, apportioned to take account of the different sizes of the two blocks?

Summary

In calculating the cost base of the block of land you sold, to must take account of the two ownership interests you held in the land. You must also apportion the cost base to take account of the unequal size of the two subdivided blocks.

Detailed reasoning

Cost base

Where someone already has a legal interest in a property, then the capital gain or loss for the interest transferred to them is calculated separately.

Application to your circumstances

In your case, your original 50% interest was acquired in 19XX and your ex-partner's 50% interest was transferred to you in 20XX. The first element of your cost base for the property consists of:

•         $X for the 50% ownership interest acquired in 19XX and

•         $X for the 50% ownership interest acquired in 20XX.

Therefore, the first element of the cost base of the property is $X + $X = $X.

The transferred cost base will include any transfer costs incurred including conveyancing and stamp duty.

Apportionment of the cost base

Your subdivision resulted in two blocks of uneven size: Block A is X and Block B is X. You will need to apportion the cost base between the two blocks. The total size of the land before subdivision was X. Therefore:

•         Block A is X% of the land before subdivision.

•         Block B is X% of the land before subdivision.