Private ruling: Capital gains tax
Date of advice: 17 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a full capital gains tax (CGT) exemption when selling a 50% share in your main residence before subdivision? | A1: Yes. | Q2: Are you entitled to a CGT exemption when transferring unit X to a family member? | A2: No.

Relevant facts and circumstances: You purchased your main residence several years ago and after 1985. The property is less than 2 hectares. The property has been your main residence for the full period of ownership. You have not used the property for income producing purposes. The property is becoming too difficult to maintain and you would like to downsize your property. You hope to demolish your existing dwelling and build two townhouses. One townhouse will be your new main residence and the other will be owned by a family member. You will engage a relation to build the new dwellings. You intend to enter into a contract to sell half of your main residence to the family member. This contract will settle before the project commences. Before settlement you will enter into a partition agreement with the family member. The dwelling will remain intact when this transfer occurs. The purpose of the Partition Agreement is to set out the understanding of the parties upon the acquisition by the family member of their half share in your property – being that each part is entitled to a portion of the land and that after registration of the proposed plan of subdivision, each party should transfer their half share in the other’s land to give effect to this. That is, the property will be co-owned by the parties jointly for a short period. The two new buildings will be constructed side by side as two separate units and not as a duplex. You will find accommodation elsewhere during construction. You will not have another main residence during construction. Due to the council’s specific requirements, the Plan of subdivision is registered after completion of the building works and two new titles are issued, one for each lot. Under this arrangement both parties will be registered proprietors on both titles equally. A mutual transfer of titles will then take place so that you will be the sole owner on the title to unit Y and the family member will be owner of the other title, unit X. It is intended that the parties provide evidence to the State Revenue Office that the subsequent transfers are merely to give effect to equality of partition and that neither party has gained any beneficial interest as a result of the transfers. You will live in unit Y as your new home upon completion.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 paragraph 118-110(1)(b) | Income Tax Assessment Act 1997 section 118-145 | Income Tax Assessment Act 1997 section 118-190

Reasons for decision: Summary: Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity. You are considered to have disposed of a CGT asset if a change of ownership occurs. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). Main residence exemption Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: ● The residence must be your home for the whole period that you owned it (paragraph 118-110(1)(b) of the ITAA 1997). ● You must not have used the dwelling to produce assessable income (unless the temporary absence rule in section 118-145 of the ITAA 1997 applies) (section 118-190 of the ITAA 1997). For the main residence exemption to apply for your whole ownership period, you must move into the dwelling as soon as practicable after you acquire the dwelling. In your case, you intend to sell half of your main residence to a family member. As you satisfy the relevant main residence conditions, any capital gain in selling the 50% share is disregarded. Subdivision of property The subdivision of land itself does not constitute a CGT event as there is no change of ownership. It is at the time of the disposal that any capital gain or capital loss may arise. Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets. Therefore, the subdivided blocks will retain the acquisition date of the original property. The cost base of the original property will be apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks. Although the main residence is generally CGT exempt, where you subdivide the property, the main residence exemption is not available if you sell the subdivided land separately from the home. The CGT implications of joint owners subdividing land and each taking a block is considered in Taxation Determination TD 92/148 Income tax: capital gains: is there a disposal and an acquisition where joint owners of a block of land subdivide that land into two smaller blocks with each owning one block? As highlighted in TD 92/148, if the joint owners take individual blocks, this involves disposals and acquisitions of interests in the blocks by the joint owners. In your case, before the subdivision of the land, you had a 50% individual interest in the whole land. After the subdivision, you have a 50% interest in each of the subdivided blocks. As there has been no change in ownership of the subdivided land, there is no acquisition or disposal for CGT purposes. However, following the transaction whereby each will have sole ownership of an individual block, each owner is taken to have disposed of their 50% interest in the subdivided block which is now owned by the other. There have been corresponding acquisitions by each owner from the other of that interest in land now owned by each of them which was previously owned by the other. Although you will move out of the dwelling during construction, as you don’t have another main residence during this time you can make an absence choice, and continue to treat the dwelling as your main residence even while you are not living there. Although the subdivision of your land is not a CGT event, it will mean that you now have two separate CGT assets instead of one. You will be moving into unit Y as your main residence after construction. As this property will be your main residence, you will qualify for a full main residence exemption when you later dispose of it. As unit X will be sold separately from your main residence it will not qualify for a main residence exemption. You will not live in unit X, therefore no main residence exemption is available when your ownership interest in this unit is sold. That is, CGT event A1 will happen when you dispose of your 50% ownership of unit X to your family member. Any capital gain made from the disposal of unit X cannot be disregarded as it was never your main residence.