Private ruling: Capital gains tax - inherited property - subdivision
Date of advice: 16 December 2020
Published: March 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you exempt from paying CGT on the sale of your subdivided property? | A1: No.

Relevant facts and circumstances: Your parent purchased a property in 20XX. You and your parent moved into the property and treated it as your main residence from when your parent purchased the property. In 20XX you and your parent built a unit at the back of the property (Unit 2). You both moved to the new unit and your parent's sibling moved into the front unit (Unit 1) to help care for your parent. Your parent passed away on during the year ended 30 June 20XX. You inherited the property upon your parent's passing, probate was granted during the year ended 30 June 20XX. You continued to live in Unit 2 as your main residence. Your parent's sibling remained living in Unit 1 until the year ended 30 June 20XX when they moved into a nursing home. You applied to subdivide the property into 2 units. You entered into a contract on in the year ended 30 June 20XX to sell Unit 1 on the proposed plan of subdivision. The subdivision was registered in the year ended 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 section 118-165 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: The sale of Unit 1 where your parent's sibling resided will not be exempt from capital gains tax (CGT) as it is not considered to be part of your main residence. Unit 1 is a separate asset from the land on which your dwelling, Unit 2, is located and because Unit 1 was sold separately the main residence exemption does not apply. | Detailed Reasoning - Detailed reasoning: You make a capital gain or a capital loss as result of a CGT event happening to a CGT asset in which you have an ownership interest. Buildings and land are specifically defined as CGT assets and the disposal of a CGT asset constitutes a CGT event A1. | Detailed Reasoning - Main residence exemption: Generally, you can disregard any capital gain or capital loss realised on the disposal of a dwelling if: a) you are an individual; b) the dwelling was your home for the whole period you owned it; and c) the dwelling was not used to produce assessable income. When you inherit a dwelling and the dwelling was the deceased's main residence, and the dwelling is your main residence while you own it you can apply the main residence exemption to the whole ownership period of both the deceased and you. The exemption extends to land provided the following requirements are satisfied: a) the land is adjacent to the land on which the dwelling is situated; b) Land does not have to be contiguous to (that is, touching or in contact with) the land on which a dwelling is situated to be 'adjacent' to the dwelling; c) the total area of land is not greater than 2 hectares; d) the land is used primarily for private or domestic purposes in association with the dwelling; and e) the land is not sold separately from the dwelling. The main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it. If you dispose of adjacent land to the same person and at the same time as you dispose of your main residence, the exemption extends to the adjacent land. | 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 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? 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 - Cost base of an inherited dwelling: If you inherit a dwelling there are special rules for calculating your cost base. The first element of the cost base or reduced cost base of a dwelling - its acquisition cost - is its market value at the date of death if any of the following apply: • the dwelling was acquired by the deceased before 20 September 1985 • the dwelling passed to you after 20 August 1996 (but not as a joint tenant), and just before the deceased died it was their main residence and was not being used to produce income, or • the dwelling passed to you as the trustee of a special disability trust. In any other case, the acquisition cost is the deceased's cost base or reduced cost base on the day they died. You may need to contact the trustee or the deceased's tax adviser to obtain the details. If that cost base includes indexation, you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out your capital gain from the property. If you're a beneficiary, the cost base or reduced cost base also includes amounts that the trustee of the deceased's estate would have been able to include in the cost base or reduced cost base. | Detailed Reasoning - Application to your circumstances: As Unit 2 has been treated as your main residence for the entire ownership period, you will qualify for a full main residence exemption in respect to Unit 2. However when Unit 2 and Unit 1 were subdivided and Unit 1 was sold, the land adjacent to your dwelling (now a separate lot containing Unit 1) can no longer be treated as being used primarily for private or domestic purposes in association with Unit 2 therefore, not subject to the main residence exemption. The ownership period in which you owned Unit 1 commenced several years ago when your parent originally acquired the property. As you have treated Unit 2 as your main residence throughout your ownership period and you cannot have more than one main residence at any one time, you will not be entitled to a partial or full main residence exemption on the sale of Unit 1. If the capital proceeds from the sale of Unit 1 are more than the cost base, a capital gain is made. The cost base of Unit 1 includes the cost of the original land (the amount your parent paid for the property when it was originally purchased) apportioned on a reasonable basis between each subdivided block and other costs associated with acquiring, holding and disposing of Unit 1.