Edited version of private advice

Authorisation Number: 1051788595438

Date of advice: 10 December 2020

Ruling

Subject: CGT - subdivision of main residence disposal of property

Question 1: Will you be entitled to fully disregard any capital gain made on the disposal of your original ownership interest in the Property land?

Answer: Yes.

Question 2: Will you be entitled to fully disregard any capital gain made on the disposal of your ownership interest in Duplex A?

Answer: Yes.

Question 3: Will you be entitled to fully disregard any capital gain made on the disposal of your XX% ownership interest in Duplex B?

Answer: No.

Question 4: Will you be entitled to fully disregard any capital gain made on the disposal of your XX% inherited ownership interest in Duplex Aand the land?

Answer: No. However, you are eligible to partially disregard any capital gain.

Question 5: Will you be entitled to fully disregard any capital gain made on the disposal of your XX% inherited ownership interest in Duplex Band the land?

Answer: No. However, you are eligible to partially disregard any capital gain.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX.

Relevant facts and circumstances

You and your spouse (Person A) purchased a property (the Property) prior to 20 September 1985 as joint tenants.

A dwelling (the House) was located on the land of the Property (Property land).

Your parents owned their own property and following the passing of one of your parents after 20 September 1985, it was decided that the House would be demolished and joined duplexes would be constructed to accommodate you and your family in one duplex, and your surviving parent (Person X) in the other duplex.

Person X sold their property and paid you $X with the names on the title of the Property changed as follows:

You and Person A as joint tenants in ½ share and Person X in ½ share as tenants in common.

A building development and subdivision application was lodged with the local council which was approved during the same year.

Person X had been under the impression that the Property needed to be subdivided to enable them to retain their Government pension, but that was not correct, and the subdivision approval was allowed to lapse.

The House was demolished, with no proceeds being received in relation to the demolished House.

The demolition of the House and construction of the duplexes during the following year took several months to complete.

During this period, you and your family lived in a rental property with Person X residing in another rental property.

You and your family, and Person X, moved into your respective duplexes after the completion certificates were issued.

You and Person A's duplex (Duplex A) is a multi-bedroom duplex with several carport spaces, with the construction being funded by the selling a XX% ownership interest in the Property to Person X and a bank loan.

Person X's duplex (Duplex B) is a multi-bedroom duplex with a carport space for which they had paid for the construction.

Person X developed health issues requiring them to be hospitalised. They moved out of their duplex into a nursing home.

Person X (the Deceased) made an absence choice to continue to treat Duplex B as their main residence after they moved out and it remained vacant until they passed away.

Probate on the Deceased's estate was granted, and you inherited the Deceased's various ownership interests in the Property.

Since the Deceased passed away you have used Duplex B to accommodate your children, with one still living there.

You and Person A engaged the services of a real estate agent to sell the whole Property a significant period after the Deceased had passed away. An auction occurred; however, you did not accept the highest bid.

You took the Property off the market and were advised that to maximise your return you would have to subdivide the Property and sell the subdivided lots with a duplex located on each one separately.

You and Person A lodged a subdivision development application with the local council which was approved several months later.

You estimate that you will sell the subdivided lots and duplexes as follows:

•                     $X million - subdivided lot consisting of Duplex A and land it is located on; and

•                     $X million - subdivided lot consisting of Duplex B and the land it is located on.

You anticipate putting the subdivided lots and duplexes on the market during the period covered by this ruling.

Assumptions:

For the purpose of this ruling the following will occur during the period covered by this ruling:

•                     The Property will be subdivided into separate lots with a duplex located on each lot (the Subdivided lots)

•                     The Subdivided lots will individually be put on the market for sale;

•                     The Subdivided lots will both be sold during the period covered by this ruling;

•                     You will make the choice under section 118-150 of the ITAA 1997 to continue treating the Property as your main residence during the period when the House was demolished and when you moved into Duplex A; and

•                     You will make a capital gain on the sale of your ownership interests in the Subdivided lots.

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 105-8

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 Division 115

Reasons for decision

You propose subdividing the Property into several lots with a duplex located on each subdivided lot which you intend selling. You will hold the following ownership interests in the Property when the subdivision occurs for capital gains tax purposes:

•                     original XX% pre-CGT ownership interest in the Property land

•                     XX% post-CGT ownership interest in Duplex A

•                     XX% post-CGT ownership interest in Duplex B

•                     XX% inherited post-CGT interest in Duplex A and the land; and

•                     XX% inherited post-CGT interest in Duplex B and the land.

Your CGT ownerships, and the CGT implications arising in relation to them when the proposed subdivided lots and duplexes are sold are discussed as follows in relation to the ownership interests you owned as considered in Questions 1, 2 and 3, and the ownership interests you inherited as considered in Questions 4 and 5:

Questions 1, 2 and 3

Capital gains tax

Capital gains tax (CGT) is tax you pay when a CGT event happens to a CGT asset which includes land and/or buildings. 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 a property.

A capital gain is made if the amount received (called capital proceeds) from the disposal of the asset exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

The cost base is made up of five elements, with the first element being the amount you paid in relation to the acquisition of the asset.

You can disregard any capital gain or loss from a CGT event A1 occurring if the asset was acquired prior to 20 September 1985, referred to as pre-CGT assets.

Buildings constructed on pre-CGT land are treated as separate assets to the pre-CGT land and will be post-CGT assets.

Subdivision of land

When a block of land is subdivided, the original land parcel is split into two or more separate assets. Subdivision itself is not considered to be a CGT event as subdividing does not change ownership of the subdivided block. The acquisition date of the subdivided block is the same acquisition date as that of the original block. Therefore, a capital gain or capital loss is not made at the time of the subdivision.

The original cost base needs to be apportioned between the new assets on a reasonable basis as outlined in Taxation Determination TD 97/3.

The subdivision does not change the ownership interests in jointly owned land/property. Taxation Determination TD 92/148 Income Tax: capital gains: is there a disposal and an acquisition where joint owners of a block of land subdivide that land into two smaller blocks with each owning one block? provides that as a result of a transaction after subdivision, where each owner who had a 50% share of the un-subdivided land when it was acquired, they will each have a 50% ownership interest in each of the subdivided lots following the subdivision.

Full main residence exemption

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence.

However, in order to obtain a full exemption from CGT, the dwelling must have been:

•                     your main residence for the entire period you owned it

•                     must not have been used to produce assessable income; and

•                     any land on which the dwelling is situated should not be more than two hectares.

For the purpose of the main residence exemption, you have an ownership interest in a dwelling from the date of settlement of the contract of purchase (or if you have a right to occupy it at an earlier time, that time) until the date of settlement of the contract of sale. This period is called your ownership period.

The following choices can enable the main residence exemption to be extended when the relevant conditions have been met:

Building a main residence

If you build a dwelling on land you acquired before 20 September 1985, being pre-CGT land, you are required to make a choice to extend the main residence exemption in relation to the newly constructed dwelling to treat it as your main residence for some or all of the period when the dwelling was being constructed, when could not live there.

In such cases the exemption applies from the time the land is acquired, but if the land was acquired more than four years before the dwelling becomes your main residence, the exemption period starts four years before the dwelling became your main residence.

You can only make this choice if the dwelling becomes your main residence as soon as practicable after the building work is finished and it continues to be your main residence for a minimum of three months.

If you do not make this choice, the main residence exemption is not available for a dwelling that is a separate CGT asset for any part of the dwelling's ownership period before it becomes your main residence.

Dwelling stops being main residence

If a dwelling stops being your main residence, you can choose to continue to treat it as a main residence for maximum of up to six years if the dwelling is used for income producing purposes, or indefinitely if it is not used for income producing purposes.

Application to your situation

We have considered the facts of your situation and have determined that the CGT provisions will apply to your various ownership interests as follows:

XX% pre-CGTownership interest in the Property land

You and Person A purchased the Property before 20 September 1985. Therefore, it is a pre-CGT asset. You disposed a XX% ownership interest in the Property to Person X after 20 September 1985. You and Person A each retained a XX% ownership interest in the Property.

The House was demolished, and the duplexes constructed on the land are viewed as separate assets to the land, being post-CGT assets as they were constructed after 20 September 1985.

For CGT purposes, when the subdivision occurs you will have an ownership in the land of each of the subdivided lots, being XX% of your original ownership interest. Both subdivided lots will be viewed as having been acquired prior to 20 September 1985, given that you had originally acquired the Property prior to that date. Accordingly, your original ownership interest in XX% of the Property land will retain its pre-CGT status and you will be viewed as having acquired the land on the same date that you had originally acquired the Property.

Therefore, when the subdivided lots and duplexes are sold you will be able to disregard any capital gain made on their sale to the extent that it relates to your original XX% pre-CGT ownership interest in the Property land.

XX% ownership interest in Duplex A

For CGT purposes, you are viewed as having a XX% ownership interest in Duplex A.

You and your family had resided at the Property in the House from when the Property was acquired until that dwelling was demolished, when you moved into a rental property while the duplexes were being constructed. You moved into Duplex A after its construction was completed and have continued to reside there until the present time.

As you meet the conditions to be able to extend the main residence exemption to continue to treat the land as your main residence for the period following the demolition of the House and the construction of Duplex A, you will be able to fully disregard any capital gain on the disposal of your XX% ownership interest in Duplex A.

XX% ownership interest in Duplex B

For CGT purposes, you are viewed as having a XX% ownership interest in Duplex B.

You have not resided in Duplex B since it was constructed. Therefore, you are not eligible to apply the main residence exemption to disregard any capital gain made on the sale of your XX% ownership interest in Duplex B.

The first element of the cost base of your XX% ownership interest in Duplex B will be your share of the construction costs incurred to build Duplex B.

Questions 4 and 5

Inherited dwellings

If you inherit an ownership interest in a deceased person's dwelling, you may be fully exempt or partially exempt when a CGT even happens to it, such as when you sell it.

If you acquire an asset owned by a deceased person as their legal personal representative or beneficiary, you are taken to have acquired the asset on the day the person died.

The deceased acquired the dwelling on or after 20 September 1985

You fully disregard any capital gain or capital loss you make when a CGT event happens to the dwelling or your ownership interest in the dwelling that the deceased acquired on or after 20 September 1985; and

•                     the dwelling was the deceased's main residence just before they passed away; and

•                     was not then used for the purpose of earning assessable income and one of the following conditions is met:

Condition 1

You disposed of your ownership interest within two years of the person's death - that is, if the dwelling was sold under a contract and settlement occurred within two years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two-year period.

or

Condition 2

From the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

•                     a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)

•                     an individual who had a right to occupy the home under the deceased's will

•                     you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Partial exemption for deceased estate dwellings

If you are not eligible to fully disregard any capital gain or loss as outlined above, you may be eligible for a partial exemption calculated using the following formula:

Capital gain or capital loss amount X Non-main residence days

Total days

Where:

Capital gain or capital loss amountis the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

Non-main residence days is the sum of:

•                     the number of days in the deceased's ownership period when the dwelling was not their main residence; and

•                     the number of days from the date of the deceased's passing until your ownership interest ends, such as when you sell the dwelling, when the dwelling was not the main residence of a person listed in Condition 2 above.

Total days in your ownership periodis the total days from the date the deceased acquired the dwelling until your ownership interest in the dwelling ends, such as when settlement on the disposal of the dwelling occurs.

Cost base

The cost base used to calculate the capital gain or loss in relation to an inherited dwelling can be:

•                     the market value of the asset on the date the deceased passed away if the dwelling was the deceased's main residence just before they passed away, and was then not used for the purpose of producing assessable income; or

•                     the cost base of the asset for the deceased on the date they passed away if the deceased was not a foreign resident just before they passed away, or the dwelling was not:

•                     trading stock of the deceased; or

•                     the main residence of the deceased just prior to them passing away.

Application to your situation

Based on the information provided, for CGT purposes the Deceased is viewed as:

•                     having acquired their XX% ownership interest in the Property after 20 September 1985 when their name was put on the title of the Property

•                     having a XX% ownership interest in both Duplex A and the land it is located on (Duplex A and the land) and Duplex B and the land it is located on (Duplex B and the land)

•                     having lived in Duplex B, which was their main residence and continued to be their main residence up to the time they passed away due to their making the absence choice when they moved out; and

•                     never having resided in Duplex A and it was not their main residence.

The Deceased passed away after 20 September 1985, and you are viewed as having acquired their ownership interests in both Duplex A and land and Duplex B and the land on that date, being the start of your ownership periods for each of them.

Duplex A and the land

As the Deceased never resided in Duplex A, it was not their main residence just prior to their passing. Therefore, the conditions for a full exemption on the disposal of Duplex A and the land as outlined above have not been met and any capital gain made in relation to this ownership interest cannot be disregarded.

However, Duplex A was your main residence from the time you acquired this ownership interest, being from the time the Deceased passed away until the present time. Therefore, you will be entitled to a partial exemption for the period of time that you have held that ownership interest and you resided at Duplex A.

When calculating the capital gain in relation to this ownership interest the total ownership period will start from the date when the Deceased acquired their ownership interest in the Property and will end when settlement on the sale of Duplex A and the land occurs.

The first element of the cost base for your inherited ownership interest in Duplex A and the land will be the Deceased's cost base on the date they passed away, which will include the market value of the land on the date they acquired their ownership interest, and any amounts they spent in relation to the construction of Duplex A.

Duplex B and the land

Duplex B was the main residence of the Deceased just prior to their passing away. However, you have not met the other conditions to be eligible to fully disregard any capital gain made on the disposal of this ownership interest.

While you are not eligible to a full exemption, based on the information provided you will be eligible to a partial exemption as discussed above in relation to any capital gain to the extent that it relates to this ownership interest.

When calculating the capital gain made on the disposal of this inherited ownership interest the cost base will be 'based on' the market value of Duplex B and the land on the date the Deceased passed away.

Conclusion

Based on the facts of your situation you:

•                     will be able to fully disregard any capital gain to the extent that it relates to your original XX% ownership interest in the Property land

•                     will be able to fully disregard any capital gain to the extent that it relates to your XX% ownership interest in Duplex A

•                     will not be able to disregard any capital gain to the extent that it related to your XX% ownership interest in Duplex B

•                     will be able to partially disregard any capital gain to the extent that it relates to your inherited XX% ownership interest in Duplex A and the land; and

•                     will be able to partially disregard any capital gain to the extent that it relates to your inherited XX% ownership interest in Duplex B and the land.

Note: The sale proceeds for both Duplex A and Duplex B will need to be apportioned among the various ownership interests on a reasonable basis.

If you meet the conditions contained in Division 115 of the Income Tax Assessment Act 1997 you will be able to apply the 50% CGT discount to any capital gain made on the disposal of your various ownership interests outlined above.