Private ruling: Capital gains tax
Published: July 2014
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: The scheme has commenced

Ruling: Q1: Are you required to pay capital gains tax on the sale of your vacant land? | A1: Yes.

Relevant facts and circumstances: A and B lived in a house on land as their principal residence for over 60 years. The property was in A's name only. As A and B aged they sought to sell part of the land and retain the home and other part of the land as their principal residence. A died after 1985 and the title transferred to B. B remained desirous to sell the land, however as there was trouble selling the land they entered into a contract with a development company to subdivide the land and sell it as more marketable blocks. The development company required the land to be transferred to them to be held in trust for B. B will receive the house lot once the finance has been repaid in full and any security relating to the finance has been discharged or withdrawn.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Subsection 128-15(2) | Income Tax Assessment Act 1997 Subsection 118-120(2) | Income Tax Assessment Act 1997 Section 118-165

Reasons for decision: Summary: Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the effect of death, and sets out what happens when a CGT asset that a deceased person owned just before their death devolves to their legal personal representative, or passes to a beneficiary in their estate. Subsection 128-15(2) of the ITAA 1997 states that the legal personal representative or beneficiary is taken to have acquired the asset on the day the deceased person died. In your case, A purchased the land prior to 1985 and the title was passed onto B on A's death. Therefore, B's ownership interest in the property is taken to have occurred on the date of A's death. As B acquired their interest in the dwelling after 20 September 1985, the dwelling is subject to CGT upon its disposal. However, as the property was B's main residence for the entire ownership period, the main residence exemption may be applicable. | Detailed Reasoning - Main residence exemption: A capital gain or loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling, or your ownership interest in a dwelling, is disregarded if the dwelling was your main residence throughout your ownership period. The exemption for a main residence is extended to include any land that is adjacent to the dwelling, to the extent to which it is used for private or domestic purposes in association with the dwelling, and it is disposed of at the same time as the dwelling. The maximum area of land covered by the exemption (including the area of land on which the dwelling is built) is 2 hectares (subsection 118-120(2) of the ITAA 1997). The main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it (section 118-165 of the ITAA 1997). Therefore, if you dispose of the land separately from the main residence, the exemption does not apply to the land, for example, you dispose of the adjacent land to the same purchaser but at a different time from when you dispose of the main residence or you dispose of the adjacent land and the main residence to different purchasers even if the disposal happen at the same time (paragraph 7 of TD 1999/68). In your circumstances, irrespective of the existence of the trust, when you sell the subdivided vacant blocks separately to the house, the land would no longer be covered by the main residence exemption and would therefore be subject to capital gains tax.