Private ruling: CGT - disposal
Published: March 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the sale of the two subdivided blocks, without the dwelling that was your main residence, qualify for the main residence exemption? | A1: No

Relevant facts and circumstances: In 19XX you acquired your main residence. The land area is XXX square metres. You lived in the property until 20XX. You applied and gained approval to subdivide the land into two separate blocks of XXX square metres (lot 1) and XXX square meters (lot 2). The house on the property straddles the two proposed blocks. After gaining approval for the subdivision you placed the two blocks on the market as vacant land and sales contracts on both of the blocks were signed in 20XX. Both contracts state that the property being sold is vacant land and that settlement is 14 days from the certificate of titles being issued. You moved out of the house in 20XX and the house was demolished shortly after that date. The two separate titles were issued in 20XX and settlement occurred 14 days after that date as per the contract.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 section 118-165

Reasons for decision: Summary: Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You may make a capital gain or capital loss as a result of a CGT event (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). The sale of a property constitutes CGT event A1 (section 104-10 of the ITAA 1997). | Detailed Reasoning - Subdivision of land: Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title. The acquisition date of the subdivided block will be your original purchase date. However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis. | Detailed Reasoning - Main residence exemption: Subdivision 118-B of the ITAA 1997 can disregard a capital gain or capital loss that happens to a dwelling that is a main residence. To get the full exemption from CGT: • the dwelling must have been your home for the whole period you owned it • you must not have used the dwelling to produce assessable income, and • any land on which the dwelling is situated must be 2 hectares or less. Section 118-115 of the ITAA 1997 includes a dwelling to be a unit of accommodation that is a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation. While the main residence exemption contained in Subdivision 118-B of the ITAA 1997 applies to the actual dwelling, section 118-120 of the ITAA 1997 extends the exemption to adjacent land that was used primarily for private or domestic purposes in association with the dwelling up to 2 hectares of land. However, section 118-165 of the ITAA 1997 provides that the main residence exemption does not extend to the sale of adjacent land if the CGT event (the disposal) does not also happen in relation to the dwelling. Taxation Determination TD 1999/73 confirms that land under a unit of accommodation qualifies for the main residence exemption only if the land and the unit of accommodation are sold together in one transaction. In your case, the dwelling was demolished and you sold the two subdivided blocks as vacant land. Therefore you did not dispose of the dwelling and the land within the same CGT event (the disposal). Accordingly, the sale of the two subdivided blocks (being land not sold with a dwelling) will not qualify for the main residence exemption and any capital gain made on the sale will not be disregarded.