Private ruling: Capital gains tax
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will you make a capital gain or loss in relation to the disposal of the property? | A1: No.

Relevant facts and circumstances: Prior to 1985 the partners purchased a large parcel of land. There was a single dwelling on the property. The land was subdivided prior to 1985 into several blocks and houses were built on the additional blocks. Some of the houses were built in 19XX; the remaining were built in 19YY for approximately $X each. None of these properties were the principal place of residence of either partner. In the 2013- 2014 financial year, the properties owned by the partners were sold to a developer.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 subsection 108-70(2) | Income Tax Assessment Act 1997 subsection 116-40(1) | Income Tax Assessment Act 1997 subsection 120-20

Reasons for decision: Summary: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. 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 ownership of the subdivided blocks. | Detailed Reasoning - Separate assets for CGT purposes: Under subsection 108-70(2), a capital improvement to a CGT asset that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is: a) more than the improvement threshold for the income year in which the event happened; and b) more than 5% of the capital proceeds from the event. For the 1988-89 financial year the threshold was $63,450 and for the 1989-90 financial year the threshold was $68,018. | Detailed Reasoning - Apportioning capital proceeds: Under subsection 116-40(1) of the ITAA 1997, if you receive a payment in connection with a transaction that relates to more than one CGT event, the capital proceeds from each event are so much of the payment as is reasonably attributable to that event. | Detailed Reasoning - Application to your circumstances: In this case, the partners purchased the property prior to 1985. At the time there was a house on the property and several more were built prior to 1985. As these assets were all acquired prior to 1985, the portion of the capital proceeds and resultant gain that relate to these assets can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997. In 19YY, the partners built several houses on the property at a cost of approximately $X each. As this amount is over the improvement threshold for the relevant year and the cost base is more than 5% of the total capital proceeds, these houses are considered separate assets for capital gains tax purposes. We accept that the portion of the capital proceeds that relates to these assets is an amount equal to the cost base. Therefore, the partners will not make a capital gain or loss in relation to the disposal of the property.