Private ruling: Capital gains tax and subdivision of land
Published: June 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | 1. Will the subdivided blocks retain the pre-CGT character of the original land? | Yes. | 2. Are the capital improvements a separate asset from the subdivided original land? | Yes | 3. Will the component of the proceeds from the disposal of the subdivided original land be subject to the capital gains tax? | No. | 4. Will the component of the proceeds from the disposal of the capital improvements to the subdivided original land be subject to the capital gains tax? | Yes.

Relevant facts and circumstances: You purchased a block of land before 1985. It has been your principal residence since completing the building of your house, which also happened before 1985. You plan to subdivide the land into X blocks in near future. The subdivision will require building some roads and providing power, water, sewer, etc. You and your spouse are the registered owners of the land prior to subdivision and after subdivision until buyers are found for the individual blocks. You have not yet taken steps to have the subdivision approved by the local government. You have drawn up plans for the proposed subdivision. You and your spouse will be overseeing the activities and subcontracting out the various functions, i.e. roads, drainage, power, water, recycled water, gas, phone, etc. You did not acquire the land with the purpose of making a profit on an isolated transaction. You do not consider yourselves carrying on a business of property or land development. You will fund the project by staging the subdivision so that your savings are used to subdivide a few blocks (stage one), and use the sale of those blocks to fund subdividing a larger parcel (stage two). You may then use the proceeds of the sale of stage two to fund stage three. You have estimated that the approximate cost of subdivision of X blocks at $X each. You have estimated sales value of the subdivided blocks to be approximately $Y each. You are not yet certain whether you will commence stage three at all. Your current dwelling, the principle residence, is located on the proposed stage three. However, you would like this private ruling be provided on the basis that you are going to move away from your current dwelling and will not retain any of the subdivided blocks as your residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(4) | Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 subsection 108-70(3) | Income Tax Assessment Act 1997 section 108-80 | Income Tax Assessment Act 1997 section 108-85 | Income Tax Assessment Act 1997 section 112-25 | Income Tax Assessment Act 1997 section 116-40

Reasons for decision: Summary: Section 112-25 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if a CGT asset (the original asset) is split into two or more assets (the new assets) and you are the beneficial owner of the original asset and each new asset, the splitting is not a CGT event. In your case, the original land is a pre-CGT asset. You plan to subdivide the original land into X blocks, and you and your spouse will be the registered owners of the land both before and after the subdivision. Therefore, no CGT event happened upon the subdivision of the original land. The subdivided blocks will retain the pre-CGT character of the original land, being pre-CGT assets. Subsection 108-70(3) of the ITAA 1997 states that the capital improvements to a pre CGT asset that are "related" to each other are taken to be a separate CGT asset if the total of their cost bases, when a CGT event happens to the original asset is: 1. more than the improvement threshold for the income year in which the event happened; and 2. more than 5% of the capital proceeds from the event. Further, section 108-80 of the ITAA 1997 provides that in deciding whether capital improvements are "related" to each other, the factors to be considered include: (a) the nature of the CGT asset to which the improvements are made; and (b) the nature, location, size, value, quality, composition and utility of each improvement; and (c) whether an improvement depends in a physical, economic, commercial or practical sense on another improvement; and (d) whether the improvements are part of an overall project; and (e) whether the improvements are of the same kind; and (f) whether the improvements are made within a reasonable period of time of each other. TD5 Capital Gains: Are intangible improvements caught by subsection 160P(6)? (TD5) further states that intangible (non-physical) improvements, such as council approval to rezone and subdivide land, are taken to be improvement of a capital nature. In your case, the capital improvements of proposed roads, power, water, sewer, council approval, etc. are to the same original land, being parts of the same project, for the same purpose of subdivision, and to be performed within a reasonable timeframe (although through stages). Therefore, the capital improvements meet the conditions to be "related" improvements under section 108-80 of the ITAA 1997. According to your estimate, the cost base of the improvements to each of the subdivided blocks is $X, higher than the improvement threshold of $136,884 (indexed each year) for 2014 income year. Also, the cost base of the improvements will be higher than 5% of the estimated proceeds (this "proceeds" include both the original land component and the capital improvements component). Therefore, the capital improvements will be regarded as a separate asset from the original land according to subsection 108-70(3) of the ITAA 1997 (this will be the case unless the improvement threshold is indexed above $180,000 in one of the future years this private ruling applies to and you disposed of the block(s) in that year, which is unlikely to happen). As a result of the capital improvements being regarded as a separate asset of the original land, when you dispose of a subdivided block, there will be two separate CGT events happening. One is the disposal of the original land component (pre-CGT asset); the other one is the disposal of the capital improvements component (post-CGT asset). Under subsection 104-10(5) of the ITAA 1997, where a CGT asset was acquired prior to 20 September 1985, any gain or loss on its disposal is disregarded. Therefore, in your case, upon the disposal of the subdivided block(s), any capital gain or loss made from the proceeds of the original land component (pre-CGT asset) will be disregarded. Under subsection 104-10(4) of the ITAA 1997, when you dispose of a post-CGT asset, you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base, and you make a capital loss if those capital proceeds are less than the asset's reduced cost base. Therefore, in your case, upon the disposal of the subdivided block(s), you will make a capital gain or loss from the proceeds of the capital improvement component (post-CGT asset), and capital gains tax will apply accordingly. Further, section 116-40 of the ITAA 1997 states that if you receive a payment in connection with a transaction that relates to more than one CGT event, the capital proceeds from each event are so much of the payment as is reasonably attributable to that event. In your case, as you will be receiving capital proceeds for both original land component and capital improvement component upon disposal of the subdivided block(s), you will need to work out the proceeds that relate to the capital improvement components (to which capital gains tax applies) when calculating your capital gain or loss. TD9 Capital Gains: How do you apportion consideration received on the disposal of a composite asset? (TD9) states that, "It is not mandatory that taxpayers obtain an independent valuation for the purposes of apportioning the consideration received on disposal. Each taxpayer should take whatever steps are appropriate to determine the valuation of the particular asset. Taxpayers who choose to do their own apportionments will, of course, need to be in a position to justify the estimates that they make." The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.