Private ruling: Subdivision of the main residence and the main residence exemption
Date of advice: 13 April 2018
Published: July 2018
Ruling period: Period ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the sale of vacant land on proposed Lot A be subject to capital gains tax (CGT)? | A1: Yes | Q2: Will the sale of vacant land on proposed Lot A qualify for the main residence exemption? | A2: No | Q3: Does a portion of the costs related to the subdivision form part of the CGT cost base of proposed Lot A? | A3: Yes

Relevant facts and circumstances: You and your spouse purchased the Property after September 1985. You and your spouse own the Property in equal shares as joint tenants. You have not used the Property to produce assessable income. You and your spouse intend to demolish the dwelling which is your current main residence. You will then subdivide the land into two lots, Lot A and Lot B. Your current main residence is situated on proposed Lot A. You plan to demolish the dwelling on proposed Lot A and sell the lot as vacant land. You will build a new dwelling on proposed Lot B; this dwelling will then be your main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 112-25(3) | Income Tax Assessment Act 1997 Section 116-25 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-165

Reasons for decision: Detailed Reasoning - Capital Gains Tax: Section 102-20 of the Income Tax Assessment Act 1997 ( ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and either a capital gain or a capital loss results. Any net capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains. The most common CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a CGT asset from one party to another. CGT event A1 occurs if you dispose of your beneficial interest in a CGT asset (section 104-10 of the ITAA 1997). Section 116-25 of the ITAA 1997 advises that the demolition of a dwelling does not result in a CGT event if no capital proceeds are received for the demolition. | Detailed Reasoning - Subdivision of land: If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain beneficial ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision. However, you may make a capital gain or capital loss when you sell the subdivided blocks. | Detailed Reasoning - Cost base on subdivision of land: If a taxpayer subdivides a block of land, each block that results is registered with a separate title. For CGT purposes, where the original land parcel is divided into two or more separate assets, the acquisition date of each of the subdivided lots will be the same as the acquisition date of the original asset. The cost base of a CGT asset is generally the cost of the original asset when a taxpayer bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. In working out the cost base of the subdivided blocks, Subsection 112-25(3) of the ITAA 1997 provides that each element of the cost base of the original asset is worked out at the time of the split and apportioned in a ‘reasonable way’ to each element of the new asset’s cost base. Taxation Determination 97/3 (TD 97/3) states that the Commissioner will accept any approach that is appropriate in the circumstances of each particular case, for example, on an area basis or relative market value basis. Expenditure forming part of the cost base of the asset is not apportioned if that amount is wholly attributable to a particular asset. For example, if a dwelling existed on an original block of land before it was subdivided into two blocks, the cost of the dwelling would only be included in the cost base of the block on which the dwelling stands. The costs of subdivision should also be apportioned between the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market value of the blocks. However, any costs solely related to one block should be attributed to that block (for example, the costs of construction and costs of connecting electricity and water to the block should be attributed solely to that block). | Detailed Reasoning - Main residence exemption: Subdivision 118-B of the ITAA 1997 provides that a capital gain or loss you make from certain CGT events concerning a dwelling that is your main residence are disregarded if all of the conditions are met: ● the dwelling must have been your home for the whole period you owned it ● you must not have used the dwelling to produce assessable income, and ● any land on which the dwelling is situated must be 2 hectares or less. Section 118-115 of the ITAA 1997 includes a dwelling to be a unit of accommodation that is a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation. Section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to the sale of land if the CGT event (the disposal) does not also happen in relation to the dwelling. Taxation Determination TD 1999/73 explains land under a unit of accommodation qualifies for the main residence exemption only if the land and the unit of accommodation are sold together as a dwelling. | Detailed Reasoning - Adjacent Land: Section 118-120 of the ITAA 1997 also allows an exemption to include land which is adjacent to your main residence provided it is used primarily for private or domestic purposes and the same CGT event happens to the land. Land is adjacent to your dwelling if it is close to, near, adjoining or neighbouring the dwelling ( Mayor of Wellington v. Mayor of Lower Hutt [1904] AC 773 at 775-776). Taxation Determination TD 1999/68 discusses what ‘adjacent’ land is for the purposes of the main residence exemption and states, at paragraph 7: 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: see section 118-165. 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. It does not extend to adjacent land, however, if you dispose of the land separately from the main residence, e.g., you dispose of the adjacent land to the same purchaser but at a different time from when you dispose of the main residence or you dispose of the adjacent land and the main residence to different purchasers even if the disposals happen at the same time. | Detailed Reasoning - Application to your circumstances: You are planning on demolishing the original dwelling on the Property and subdividing the block into two Lots. You are demolishing the dwelling prior to sale and the exemption under Subdivision 118-B of the ITAA 1997 does not apply to vacant land. Furthermore, when proposed lot A is sold, CGT event A1 will have occurred. As you are not selling the vacant land with the dwelling that was your main residence, the adjacent land exemption specified in Section 118-120 of the ITAA 1997 does not apply. Additionally, you are subdividing the Property into two Lots, Lot A and Lot B. The costs of subdividing the Property appropriately apportioned between the two lots as per subsection 112-25(3) of the ITAA 1997. For example, it would not be appropriate to attribute the costs of demolition of the dwelling on Lot A to the cost base of Lot B. Equally, it would not be appropriate to attribute the construction costs of the dwelling on Lot B to the cost base of Lot A. However costs such as but not limited to survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market value of the two proposed Lots.