Private ruling: Capital gains tax - Market valuation for portion of land exceeding two hectares
Published: May 2015
Ruling period: Year ended 30 June 2015. | Year ended 30 June 2016.
Date scheme commenced: After 20 September 1985.

Ruling: Q1: Is the assessed market valuation of a certain amount for the portion of land exceeding two hectares an acceptable valuation for capital gains tax purposes? | A1: Yes.

Relevant facts and circumstances: Sometime after 20 September 1985 you purchased an area of land exceeding two hectares. You built your residence as an owner builder and moved into the residence, it has been your main residence since that time and will remain so up until the sale of the property is finalised. Improvements to the land have included the house, sheds, fencing and landscaping. You have sold the property and you will be liable to pay capital gains tax on the area of land exceeding two hectares that does not qualify for the main residence exemption. You therefore require a market value for the portion of land exceeding two hectares. The local environmental department has provided an annual valuation at June 2015 of a certain amount. The chosen portion of land exceeding two hectares that is not eligible for the main residence exemption is located within the flood plain/gully which forms the drainage channel for the upstream catchments, so that even small rain events cause it's flooding. It lies between a retention pond on the one boundary and a dam on the neighbouring opposite properties. The local council flood maps indicate that it lies within the flood zone. The council imposes total building/development constraints on land in this flood zone and have indicated that it is to be donated to Council as a drainage channel if the land is ever developed. This portion of land is unsuited for agricultural purposes because of periodic flooding and is poor quality grazing because of its waterlogged nature and the grass types which grow in the environment. Your discussions with the local environmental department employees indicate that their valuation is based on recent sales of similar quality land, they indicate that valuation of the portion of land in the flood zone is extremely difficult as no sales of land entirely in the flood zone exist and are unlikely to occur. Mathematical averaging of the local environmental valuation for the entire property is not suitable because of the extreme variation for land above and below the flood zone level. The following documents are to be read with and form part of the scheme for the purposes of this private binding ruling: • local council - map of the property with the nominated portion of land exceeding two hectares shaded/identified; • Copy of the valuation report for the portion of land exceeding two hectares completed by a Certified Practising Valuer.

Relevant legislative provisions: Income Tax Assessment Act 1997 , Section 110-25 | Income Tax Assessment Act 1997 , Section 116-20 | Income Tax Assessment Act 1997 , Division 995 | Income Tax Assessment Act 1997 , Sub-division 960-S

Reasons for decision: Summary: The assessed market valuation of a certain amount for the portion of land exceeding two hectares is an acceptable valuation for capital gains tax purposes. | Detailed Reasoning - Detailed reasoning: The Australian Taxation Office (ATO) publication 'Market valuation for tax purposes' provides assistance to taxpayers and their advisors (including valuers) on the processes to establish a market value for taxation purposes. For tax purposes, it is usually the valuation process undertaken rather than who conducted it that governs the acceptability of the valuation. In summary a valuation should: • be replicable - in effect, this means the valuation should be documented and explained well enough that another person or valuer can understand how the value was determined; and • preferably be undertaken by a suitably qualified and experienced person in relation to the asset being valued. The valuation report should: • be understandable; and • objectively demonstrate the valuation process undertaken in accordance with valuation industry practices. In your circumstances you have engaged a Certified Practising Valuer to assess the market value of the land in excess of two hectares that will be excluded from the capital gains tax main residence exemption. This valuation meets the guidelines as set out in the ATO document 'Market valuation for tax purposes' and is therefore an acceptable market valuation. | Detailed Reasoning - Guidance regarding Cost base: You asked for some general advice about cost base. The cost base of an asset comprises the costs involved in acquiring, holding and disposing of the asset. The cost base is made up of five elements. 1. Money paid for the asset - this includes the actual amount that you paid for the acquisition of the land. 2. Incidental costs of acquiring and disposing of the asset - including the legal and estate agents costs of sale. 3. Non-capital costs related to the asset including rates, interest and land tax. 4. Capital costs associated with increasing the value of the property - in your case erecting the dwelling, sheds, fences and landscaping. 5. Capital costs to preserve or defend your title. Note: If, in your circumstances you make a capital loss the cost base is termed the reduced cost base . The reduced cost base does not allow the third element (Non-capital costs related to the asset including rates, interest and land tax) costs to be included. As you are aware the cost base also needs to be apportioned between the two hectares containing the dwelling and the remaining property, Taxation Determination TD 1999/67 Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares, can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land ? (TD 1999/67) provides the ATO view on how any capital gain or capital loss is calculated. I have included a copy of TD 1999/67 for your reference.