Private ruling: Capital gains tax - land subdivision
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1993

Ruling: Q1: Are you entitled to a capital gains tax exemption when you subdivide part of your property and transfer it to your children? Answer No.

Relevant facts and circumstances: You own a property consisting of a house which was originally purchased in 1942 by your grandparents-in-law. Your spouse resided in the property from their birth until they got married. You and your spouse in 19XX purchased the property from your parent-in-law to allow them to acquire a small unit for retirement. You are going to subdivide the back half of the property and build two home units, one for each of two of your children. The titles will be transferred into their names once the units are built. Your children will pay you in monthly instalments, which will supplement your and your spouse's retirement. When you and your spouse pass away any remaining amounts owing on the two home units will be erased.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20, Income Tax Assessment Act 1997 Section 112-25, Income Tax Assessment Act 1997 Subsection 118 -115(1), Income Tax Assessment Act 1997 Section 118 -110 and Income Tax Assessment Act 1997 Section 118 -120.

Reasons for decision: Summary: You are not entitled to a capital gains tax exemption when you subdivide your property and transfer it to your children. | Detailed Reasoning - Detailed reasoning: The subdivision of land and construction of a dwelling does not become a capital gains tax (CGT) event until ownership interest in the land changes. Each subdivision is simply registered under a separate title and becomes separate dwellings. A CGT event will occur when each subdivision is disposed of. The most common disposal of an asset occurs when ownership changes. For example a name transfer on an asset's title. The term dwelling means a building that consists wholly or mainly of residential accommodation. Land fenced off around a new dwelling is considered part of that dwelling and forms a new separate asset. Any capital gains or capital losses made from assets acquired after 20 September 1985 are subject to the CGT provisions. A dwelling that is a main residence is however exempt throughout the period you owned it. The adjacent land is also exempt providing it is sold with the dwelling, is less than two hectares and is used primarily for private or domestic purposes in association with that dwelling. In your case, you acquired the property with your spouse in 19XX when the title was transferred out of your parent-in-law's name. This asset was therefore acquired after 20 September 1985 and is subject to the CGT provisions. You are adding two additional dwellings to the land which you will never have resided in. Furthermore a CGT event will occur after the dwellings are built when you transfer each title into your children's names. Therefore these two dwellings and their associated land are subject to any capital gains or losses made at this time compared to when it was purchased in 1993. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20, Income Tax Assessment Act 1997 Section 112-25, Income Tax Assessment Act 1997 Subsection 118 -115(1), Income Tax Assessment Act 1997 Section 118 -110 and Income Tax Assessment Act 1997 Section 118 -120.

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