Private ruling: Capital gains tax – subdividing land – cost base – marriage breakdown
Date of advice: 6 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017.
Date scheme commenced: 1 April XXXX.

Ruling: Q1: Will the rollover provisions under Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the interest transferred from your former spouse to you? | A1: No. | Q2: Can you include an apportionment of rates, land taxes and loan interest in the cost base of the subdivided block? | A2: Yes.

Relevant facts and circumstances: You acquired the property as joint tenants with your former spouse sometime after 20 September 1985. You have always used the property as your main residence. The property has not been used to produce income. Some years later, you and your former spouse reached an out of court divorce settlement by way of mediation. The arrangement was not a court ordered settlement. Under the settlement, you paid your former spouse an amount and they transferred their interest in the property to you. Some years later, you demolished the old dwelling on the property and subdivided the land. The original block was rectangular in shape, with the subdivision occurring down the centre of the block, resulting in equal size blocks. You constructed a new dwelling on one of the subdivided blocks to use as your main residence. You recently sold the vacant subdivided block in an arm’s length transaction. You will include an apportionment of the following costs in the cost base of the vacant block you sold: - Initial purchase cost - Settlement costs on purchase - Subdivision costs - Stamp duty on purchase - Surveyor fees You will include 100% of the selling costs in relation to the vacant land in the land’s cost base.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Division 110 | Income Tax Assessment Act 1997 Subdivision 126-A

Reasons for decision: Summary: You can include apportioned amounts of interest on money borrowed to acquire the asset, as well as rates and land taxes with respect to each of your interests in the land. | Detailed Reasoning - Marriage breakdown rollover relief: As a general rule, capital gains tax (CGT) applies to all changes of ownership of assets acquired on or after 20 September 1985. However, marriage breakdown rollover relief under Subdivision 126-A of the ITAA 1997 is potentially available when CGT event A1 happens involving asset transfers between spouses or former spouses. The rollover applies if your marriage or relationship ended on or after 20 September 1985, and: ● you transfer an asset or a share of an asset to your spouse ● you receive an asset or a share of an asset from your spouse, or ● a company or trustee of a trust transfers an asset to you or your spouse. Prior to 13 December 2006 for the rollover to apply, the capital gains tax (CGT) event must have happened because of: ● an order of a court or a court order made by consent under the Family Law Act 1975 , or a similar law of a foreign country, or ● a court order under a state, territory or foreign law relating to breakdown of relationship between spouses. From the 13 December 2006, marriage breakdown rollover relief under section 126-5 of the ITAA 1997 applies if CGT event A1 happens because of something done under a written agreement that is binding because of a state, territory or foreign law relating to de facto marriage breakdowns. Where the conditions for the relief are met, the relief applies automatically; it is not necessary for the taxpayer to elect for the relief to apply and it is not possible to elect that it not apply. However, if you and your spouse divide your property under a private or informal agreement, the marriage relationship breakdown rollover does not apply. In this case, the spouse to whom the asset is transferred is taken to have acquired the asset at the time of transfer. | Detailed Reasoning - Application to your situation: In your case, you did not acquire the interest from your former spouse under a court order and the conditions for the marriage breakdown rollover have not been met. You are considered to have acquired the additional interest in the property upon transfer to you from your former spouse in XXXX. Where you have not dealt at arm’s length with your former spouse you are required to use the market value of the property when calculating the cost base (section 112-20 of the ITAA 1997). The first element of your cost base will be replaced with the market value at that time that you acquired the property in XXXX. | Detailed Reasoning - Cost base of vacant land: Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title. However, the cost base of the unsubdivided land is apportioned between the subdivided blocks on a reasonable basis. Section 110-25 of the ITAA 1997 sets out the general rules of cost base. The cost base of a CGT asset consists of five elements: 1. The total of any money you have paid to acquire the asset; 2. The incidental costs incurred in acquiring the asset (such as stamp duty and brokerage fees); 3. Non-capital costs of ownership (such as interest and costs of maintaining the asset etc); 4. Capital expenditure incurred to increase or preserve the asset's value; and 5. Any costs incurred to establish, preserve or defend your title to the asset. Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis. | Detailed Reasoning - Application to your situation: In your case, following the subdivision of the property, you held two interests in the vacant subdivided block prior to its sale. You acquired the first interest in XXXX when you purchased the property with your former spouse. You acquired a subsequent interest in XXXX when your former spouse transferred their interest to you, under a private agreement. In relation to your first 50% interest, acquired in XXXX, the Commissioner considers it reasonable that you include a 50% apportionment of the costs in relation to that half interest. This is effectively 25% of the costs of purchase, stamp duty, interest, rates etc. In relation to the second 50% interest, acquired upon your marriage breakdown in XXXX, the first element of the cost base will be the market value of the asset on the date of its transfer to you. You are entitled to include 50% apportionment of the costs incurred in relation to that interest.