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

Ruling: Q1: Is the sale of the subdivided block of land a capital gains tax (CGT) event? | A1: Yes. | Q2: Will the cost base of the subdivided block of land be equal to the cost at the time it ceased to be trading stock? | A2: Yes.

Relevant facts and circumstances: The trust purchased land after 20 September 1985. The trust subdivided the land and all but one lot were sold. All income from the sale of the lots was assessed as ordinary income as the trust was in the business of subdividing land. The trust retained the remaining lot and there were no improvements made since the subdivision was completed. The trust intended to hold the block of land indefinitely as an investment. The trust has not been involved in any subdivisions, nor has any of its associates, since this undertaking. The health of a director of the trustee company has deteriorated. As a result of their ill health, the trustee decided to simplify the affairs of the trust and sold the remaining block. The trust ceased holding the lot as trading stock when the subdivision was completed.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 70-110(1) | Income Tax Assessment Act 1997 section 104-10

Reasons for decision: Summary: A taxpayer will have a capital gain only if a CGT event happens. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) specifies that CGT event A1 happens if a taxpayer disposes of a CGT asset. In this case we accept that the trust ceased holding the land as trading stock and began holding it as a capital asset. The trust is no longer involved in the subdivision and development of land. Therefore, when the trust sold the land a CGT event occurred. The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. Elements of the cost base The cost base of a CGT asset is made up of five elements: • money or property given for the asset • incidental costs of acquiring the CGT asset or that relate to the CGT event • costs of owning the asset • capital costs to increase or preserve the value of your asset or to install or move it • capital costs of preserving or defending your ownership of or rights to your asset. You stop holding an item as trading stock but still own it Under subsection 70-110(1) of the ITAA 1997, if you stop holding an item as trading stock, but still own it, you are treated as if: a) Just before it stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business for its cost; and b) You had immediately bought it back for the same amount. | Detailed Reasoning - Example 1:: You are a sheep grazier and take a sheep from your stock to slaughter for personal consumption. You are treated as having sold it for its cost. This amount is assessable income, just like the proceeds of sale of any of your trading stock. Although you are also treated as having bought the sheep for the same amount, it would not be deductible because the sheep is for personal consumption. In this case, you ceased holding the land as trading stock in 200X. Therefore, just before you ceased holding the land as trading stock, subsection 70-110(1) of the ITAA 1997 treats you as though you had disposed of it at arm's length and immediately bought it back for the same amount. Therefore, the cost base of the land will be equal to the amount that the trust was deemed to have purchased it back for in accordance with subsection 70-110(1) of the ITAA 1997.