Private ruling: Capital gains tax
Published: July 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | 1. Is the cost base apportioned between your new assets after subdivision? | Yes | 2. Are you entitled to the 50% discount? | Yes

Relevant facts and circumstances: You and your spouse jointly purchased land on post 1985. The land was made up of two lots, lot A (larger parcel of land) and lot B. You started to build a house on your land. You decided to sell the smaller portion of land known as Lot B. When you consulted the council, it was realised that part of the road had been constructed on part of your land. You had to have the land surveyed and amendments put in place to show the new boundaries, this involved giving the council some of the land for road usage. You incurred costs in relation to the subdivision such as surveyors, council fees, solicitor fees, registration fees and selling agent fees. You sold Lot B.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT): Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss. The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity. | Detailed Reasoning - CGT assets include real estate.: Subsection 104-10(3) of the ITAA 1997 describes when the event happens. The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs. A taxpayer makes a capital gain if the capital proceeds from the disposal are more than the asset's cost base. A taxpayer makes a capital loss if those capital proceeds are less than the asset's reduced cost base. | Detailed Reasoning - Subdivision and sale of vacant land: When you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Where the titles to the subdivided blocks show the same ownership interest as the original land, each subdivided block retains its original acquisition date. The subdividing of the land is not itself a CGT event. In your case, CGT event A1 happened when you sold lot B. The time of the event was when you entered into the contract for the sale of the property. | Detailed Reasoning - Calculating the capital gain: You make a capital gain where the capital proceeds exceed the cost base. Generally, the capital proceeds are the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event. The cost base of an asset is generally what the asset costs you. The cost base is made up of five elements: 1. money paid for the asset 2. incidental costs of acquiring or selling it e.g. stamp duty, conveyancing, real estate agent fees, surveyor, valuer; costs of transfer. 3. cost of owning it (e.g repairs) 4. cost associated with increasing or preserving its value 5. cost to preserve or defend a taxpayer's title or right to it For more information in relation to what can be included in the cost base refer to www.ato.gov.au and enter into the search tab cost base elements or QC17161 (which is a quick code to take you direct to the internet page). | Detailed Reasoning - Apportionment of cost base after subdivision: The subdivision of a property creates a new asset and the cost base of the original property needs to be 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 (that is, on an area basis or relative market value basis). A reasonable apportionment of the original cost of the land can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case PS LA 2005/8 outlines what are acceptable valuation for CGT purposes. Where the market value of an asset needs to be determined, you can choose to: (i) Obtain a detailed valuation form a qualified valuer; or (ii) Compute their own valuation based on reasonably objective and supportable data. The cost of subdivision should also be apportioned between the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as surveying, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the two blocks. However any cost solely related to one block should be attributed to that block e.g. the costs of connecting electricity and water and any construction or capital improvement costs to the block which is to be sold should be attributed solely to that block. | Detailed Reasoning - CGT discount: As you have owned the post-CGT interest in the land for more than 12 months, you are entitled to a 50% discount on any capital gain you make when you sold the land. The amount would then be split equally between you and your spouse as the land was owned in joint names. | Detailed Reasoning - CGT and your tax return: Capital gains are not taxed separately; rather they are included in your annual income tax return. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate. Depending on your total taxable income (including your net capital gain) for the year ended 30 June 2014 you may or may not need to lodge a tax return. You will need to check your individual circumstances or check with a registered tax agent to ascertain if you need to lodge a tax return. | Detailed Reasoning - Payment of tax debt: If you have a tax debt a payment arrangement can be organised by calling our automated self-help number and following the prompts (for debts less than $25,000 and certain other conditions). For debts more than $25,000 or if ineligible for an automated payment arrangement, taxpayers may be given extra time to pay depending on individual circumstances. In some circumstances if the debt would result in serious hardship, taxpayers can apply for a release from payment of tax debt. Further details regarding payment arrangements can be found on www.ato.gov.au or calling 132 861.