Private ruling: Income tax - Capital gains tax - CGT events - CGT event A1 - disposal of a CGT asset
Date of advice: 6 September 2018
Published: October 2018
Ruling period: For the financial year ended 30 June 2018
Date scheme commenced: 1 July2017

Ruling: Q1: Is the capital gain or loss made upon the disposal of vacant land on which you intended to construct your main residence disregarded? | A1: No | Q2: Can you apply the 50% discount to the capital gain on disposal of property on completion? | A2: Yes | Q3: Does the cost base of the vacant land include council rates, water rates and other statutory charges and insurance costs from the date of acquisition until disposal of vacant land on which you intended to construct your main residence? | A3: No

Relevant facts and circumstances: You entered into a contract to purchase land in 19XX. The land was x ha. It surrounded a farm dam. The land was being sub-divided as it was deemed unsuitable for agricultural activities by the Council. A contract was drawn up stipulating that the block of land was being purchased for a rural dwelling on the condition the sub-division was approved by Council for residential development. A separate title was issued for the sub-division by the Land Titles Office and settlement of the land proceeded in late 19XX. It was your intention to use this land to build a new dwelling that would become your main residence. The block was fenced, access graded and re-gravelled. Clearing commenced, the land was made suitable to use for grazing whilst clean-up activities were conducted (the property was smothered in blackberries, gorse and bracken). A shed was erected for animal shelter. Local councils commenced merging with other councils which created new Councils. The merger was finalised in 19XX. Due to circumstances beyond your control and without consultation a new planning scheme was developed by the Council and the land was rezoned to rural. Government Valuation of the land was greatly reduced after the rezoning. Over the course of several years you negotiated with the Council to have the property rezoned back to residential development as the property was unsuitable for agricultural activity. In 20XX, the Protection of Agricultural Land Policy was developed. You spent a significant amount of time researching, meeting with local politicians, consulting with Councillors and writing to government authorities. You lodged a Discretionary Development Application with the Council. You organised and paid for professional reports to submit with your application as requested by Council. The application was declined. You were renting and bought a small house whilst you were disputing the Council’s decision. You placed the block land on the market in 20XX. You were offered $xxx,xxx for the block of land on the condition it could be developed. This offer was withdrawn when the purchaser enquired with Council regarding the proposed development. You sold the block of land in 20XX for $xx,xxx.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 subdivision 115-A | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-150

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT): A capital gain or capital loss an individual makes from a capital gains tax (CGT) event that happens to a dwelling is disregarded under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) if the dwelling was the individuals main residence for the entire period you owned it. Section 118-150 of the ITAA 1997 provides that the main residence exemption may be applied to land retrospectively for a maximum period of four years, provided that: ● a dwelling is actually constructed on the land, ● you move into the dwelling as soon as practicable after the construction is finalised; and ● it continues to be your main residence for at least three months. The mere intention to construct a dwelling or to occupy a dwelling as a sole or principle residence, but without actually doing so, is insufficient to obtain the exemption. You are not entitled to the main residence exemption as a dwelling was never constructed on your vacant block of land. While we appreciate that you fully intended to build your main residence on the vacant land a dwelling was not constructed on the vacant land. The Commissioner has no discretion to disregard any capital gain or capital loss you made upon its disposal. | Detailed Reasoning - Discount method: Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied: ● you are an individual, a trust or a complying superannuation entity ● a CGT event happens to an asset you own ● the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 ● you acquired the asset at least 12 months before the CGT event, and ● you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year. | Detailed Reasoning - Calculating the cost base/reduced cost base of real estate - general: The basic rules for determining the cost base/reduced cost base of any CGT asset are the same but some additional rules apply in relation to real estate. In most cases the cost base of a CGT asset is comprised of costs that can be attributed to one of the five elements described below: ● The first element: money or property given for the asset. ● The second element: incidental costs of acquiring the asset or that relate to the CGT event. ● The third element: costs of owning the asset. ● The fourth element: capital costs to increase or preserve the value of your asset or to install or move it. ● The fifth element: capital costs of preserving or defending your ownership of or rights to the asset. The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element. The third element of the reduced cost base relates to balancing adjustments for certain depreciating assets and does not generally apply to residential real estate. With respect to real estate, third element costs (costs of owning the asset) cannot be included in the cost base of property acquired before 20 August 1991. Nor can such costs be included in the reduced cost base of property, regardless of the acquisition date. Typically, third element costs in respect of real estate would include costs of rates, insurance, land tax, maintenance and interest on money borrowed to buy a property or finance improvements to it.