Private ruling: Capital gains tax - main residence, subdivision and transfer of vacant land to child
Published: October 2013
Ruling period: 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you deemed to have received the market value of subdivided block on the disposal of it to your child? | A1: Yes. | Q2: Is the capital gain made on the disposal of the subdivided block disregarded? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. After 20 September 1985 you acquired a property. You established the property as your main residence. Approximately two years later you subdivided the property into two blocks. You retained block one with the dwelling on it. You had to demolish the pergola attached to the dwelling to enable the subdivision. Block two was disposed of to your child for the full costs of the subdivision. Your child has a medical condition, they are single and having them close enables you to help them when required. Subdivision and the transfer of title were completed early this year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 118-110. | Income Tax Assessment Act 1997 Section 118-120. | Income Tax Assessment Act 1997 Section 116-30. | Income Tax Assessment Act 1997 Section 110-25. | Income Tax Assessment Act 1997 Section 115-5. | Income Tax Assessment Act 1997 Section 112-30. | Income Tax Assessment Act 1997 Section 112-25

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The most common CGT event (CGT event A1) happens if you dispose of a CGT asset, such as block of land to someone else. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs. CGT event A1 occurred upon disposal of the subdivided block of land (block two) to your child. | Detailed Reasoning - Subdivision: If 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. Subdividing of land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or capital loss at the time of subdivision. However, you may make a capital gain or capital loss when you dispose of the subdivided blocks. The date you acquired your interest in the subdivided blocks is the date you acquired your interest in the original land and the cost base is divided between the subdivided blocks on a reasonable basis. A reasonable apportionment of the original cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and the market value or a relative market value basis if this is the not the case. A capital gain will be made on the disposal of the subdivided block if the amount received from the disposal is greater than the cost base of that block. The first element of the cost base of the vacant block should be worked out by apportioning the cost base of the property between the block of land containing the dwelling and the vacant block of land. The enclosed Taxation Determination TD 97/3 provides information on how these costs are apportioned. The costs of subdivision incurred should also be apportioned between the blocks. If the blocks are of unequal market value, the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks. However, any cost solely related to one block should be attributed to that block (for example the costs of connecting electricity and water to the block which is to be disposed of should be attributed solely to that block). Therefore, the costs you incurred in the demolition of your pergola cannot be included in the cost base of block two because they are attributable to your dwelling and not the block that you disposed of. | Detailed Reasoning - Main residence: Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that was your 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 two hectares or less. However, the exemption does not apply if the land is disposed of separately to the dwelling. | Detailed Reasoning - Capital proceeds: Whatever you receive as a result of a CGT event is referred to as your 'capital proceeds'. For most CGT events, your capital proceeds are an amount of money or the value of any property you received (or entitled to receive). | Detailed Reasoning - Non-Arms Length Transactions: There are special CGT rules that apply if a person disposes of an asset to a related party, such as a family member. Such a transaction is considered to be a non-arms length transaction and the market value substitution rule is used in calculating your capital gain or loss. When this occurs, the capital proceeds are replaced with the market value of the asset. In determining whether parties deal at arms length, you need to consider any connection between them and any other relevant circumstances. Because there is a definite connection between you and your child, it is deemed that you are not dealing at arm's length. Therefore, you are deemed to have received the market value of block two on the date of transfer. There are a number of methods for determining the market value of the property at the time of disposal, such as: · obtaining a valuation from a qualified valuer; or · compute your own valuation based on reasonably objective and supportable data. We can appreciate your circumstances in relation to your child, however, the Commissioner does not have any discretion to disregard any capital gain made on the disposal of vacant land. | Detailed Reasoning - Cost base: The cost base of a CGT asset is generally the cost of the asset when you brought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. The cost base of a CGT asset is made up of five elements: 1. money or property given for the asset 2. incidental costs of acquiring the CGT asset or that relate to the CGT event 3. costs of owning the asset 4. capital costs to increase or preserve the value of your asset or to install or move it 5. capital costs of preserving or defending your ownership of or rights to your asset. | Detailed Reasoning - CGT discount method: You can use the discount method to calculate your capital gain as: · you are an individual; · the CGT event happened to an asset you owned after 21 September 1999; · you owned the asset for 12 months; and · the cost base of the asset was not indexed.