Private ruling: Capital gains tax - disposal of land
Published: June 2012
Ruling period: Year ending 30 June 2013.
Date scheme commenced: 1 July 2007.

Ruling: Q1: Will there be capital gains tax (CGT) consequences on the disposal of the portion of land? | A1: Yes.

Relevant facts and circumstances: You purchased a property from a developer on the condition that it was leased back to the developer for less than 4 years. The property became your principle place of residence after the lease period. The developer erected a fence that has resulted in a portion of your land being fenced off from you. The developer is offering to buy the portion of land from you to give to your neighbour.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20, | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 110-25, | Income Tax Assessment Act 1997 Section 112-30, | Income Tax Assessment Act 1997 Section 115-10, | Income Tax Assessment Act 1997 Section 115-15, | Income Tax Assessment Act 1997 Section 115-20 and | Income Tax Assessment Act 1997 Section 115-25.

Reasons for decision: Summary: You can make a capital gain or loss if a CGT event happens to a CGT asset. Land is defined as a CGT asset. CGT event A1 occurs when you dispose of an asset to someone else. The time of the event is: (a) when you enter into the contract for the disposal: or (b) if there is no contract when the change of ownership occurs. When the contract for disposal is entered into to dispose of the portion of land, or when the change of ownership occurs CGT event A1 will happen to the portion of land. You make a capital gain if your capital proceeds are greater than your cost base for example, if you receive more for an asset than you paid for it. You make a capital loss if your capital proceeds are less than your reduced cost base. Capital proceeds is the term used to describe the amount of money that you receive as a result of a CGT event happening. Therefore, the amount of money that you receive as a result of the disposal of the portion of land will be the capital proceeds. In working out whether or not you have made a capital gain or loss, you must apply the apportionment rules when calculating the cost base. The cost base and reduced cost base of a CGT asset is apportioned if a CGT event happens to some part of the asset, but not to the remainder of it. In your case, there is a CGT event happening only to a portion of your land. Therefore, you must apportion the cost base of the land you are disposing. The cost base for the CGT asset representing the part to which the CGT event happened is worked out using the formula: Cost base of the asset × Capital proceeds for the CGT event happening to the part Those capital proceeds plus the market value of the remainder of the asset The remainder of the cost base of the asset is attributed to the part that remains i.e. the land. Example: You acquire a truck for $24,000 and sell its motor for $9,000. Suppose the market value of the remainder of the truck is $16,000. The cost base of the motor is: $24,000 × $9,000 $9,000 + $16,000 = $8,640 To use the formula to work out the cost base of the portion of land you will need to work out the cost base of the entire land. The cost base of your land is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. The cost base of your dwelling is made up of five elements: · money or property given for the asset, · incidental costs of acquiring the CGT asset or that relate to that event, · costs of owning the asset, · capital costs to increase or preserve the value of your asset or to install or move it, · capital costs of preserving or defending your ownership of rights to your asset. You need to work out the amount for each element then add them together to work out the cost base of your dwelling. The discount method can be used to calculate a capital gain if: · 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. In your case you are an individual who will have a CGT event happen to an asset that you own. The CGT event will happen after 11.45am (by legal time in the ACT) on 21 September 1999 and you acquired the asset at least 12 months before the CGT event. You can not choose to use the indexation method. As you have satisfied the eligibility requirements to use the discount method you can discount any capital gain you make from the disposal of the portion of land by 50%.

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