Private ruling: Capital Gains Tax - Main residence exemption - Subdivision
Published: May 2015
Ruling period: Year ending 30 June 2015. | Year ending 30 June 2016. | Year ending 30 June 2017.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Are you entitled to a full main residence exemption from capital gains tax (CGT) on the disposal of the subdivided block that will remain as your main residence? | A1: Yes. | Q2: Is CGT payable on the sale of the subdivided block(s) of your property (that are not your main residence)? | A2: Yes. | Q3: Is CGT payable on the disposal of the subdivided block of your property that you must give free of charge to the Crown? | A3: Yes.

Relevant facts and circumstances: You inherited the property prior to 20 September 1985. The property is situated on over two hectares of land and you built a house on the land prior to 20 September 1985. The property has been your main residence for the entire time. You remained sole owner of the property until the 19XX-YY financial year, when % of the property was transferred to your spouse. Your spouse transferred their share in the property back to you in the 20VV-WW financial year. You now propose to subdivide the land; however a pre-condition of subdivision requires the transfer of a percentage of your land to the Crown free of charge for the use of Public Open Space. You propose to sell between a portion of the land (as vacant land), and retain between the rest (less than two hectares) for your and your spouse's continued main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20. | Income Tax Assessment Act 1997 subsection 104-10(5). | Income Tax Assessment Act 1997 section 110-25. | Income Tax Assessment Act 1997 section 115-10. | Income Tax Assessment Act 1997 section 116-20. | Income Tax Assessment Act 1997 section 118-110.

Reasons for decision: Detailed Reasoning - Capital gains: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital loss or gain is made as a result of a capital gains tax (CGT) event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else. The time of the event is when a contract of sale is entered in to, or if there is no contract, when the change of ownership occurs. CGT assets include real estate acquired on or after 20 September 1985. In your case, you are taken to have acquired a % share of the property when your spouse transferred their share of the property to you. This interest in the property is considered a CGT asset. You also have a separate interest in the property (the remaining %) which was acquired prior to 20 September 1985 and is a pre-CGT asset. You will not be liable for CGT on the disposal of your pre-CGT interest in the property as per paragraph 104-10(5)(a) of the ITAA 1997. The cost base of the post-CGT asset is % of the market value on the date your spouse transferred their interest to you. Subdivision When 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 as long as the ownership of the subdivided blocks does not change. Therefore, you do not make a capital gain or capital loss at the time of subdivision. The date you acquired your interests in the subdivided blocks is the date you acquired your interests in the original land and the cost base of the original purchase is divided between the subdivided blocks on a reasonable basis. In your case, if you subdivide into several blocks; one block given to the Crown as part of the conditions of subdivision, one block with your dwelling kept as your main residence and the remaining blocks sold as vacant land, for each blocks you will have a % pre-CGT interest (CGT free) and a % post-CGT interest in each of the separate blocks. | Detailed Reasoning - Main residence exemption for your dwelling: Generally, a capital gain or loss can be ignored from a CGT event that happens to an ownership interest in a dwelling that is a taxpayer's main residence. To get the full exemption from CGT: • 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. In your case, if you keep one of the subdivided blocks (less than 2 hectares) with your current dwelling on it and it continues to be your main residence, and you do not use the dwelling to produce assessable income, your entire 100% interest in this property (the dwelling and its associated subdivided block of land) will be exempt from CGT provided that the dwelling and land are disposed of in one transaction. | Detailed Reasoning - Selling the subdivided block(s) of land (that are not your main residence): Subsection 104-10(5) of the ITAA 1997 states you make a capital gain from a CGT event A1 happening if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base. The general rules for determining the capital proceeds of a CGT event are set out in section 116-20 of the ITAA 1997, and are the total of: • the amount of money you receive, or are entitled to receive, in respect of that event happening, and • the market value of any other property you receive, or are entitled to receive, in respect of that event happening (worked out as at the time of the event). | Detailed Reasoning - Cost base: Upon disposal of a post-CGT asset, the cost base is made up of five elements: 1. The first element is made up of the money paid or required to be paid to acquire the CGT asset. 2. The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant. 3. The third element consists of non-capital costs incurred in connection with their ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums. An individual can include non-capital costs of ownership only in the cost base of assets acquired after 21 August 1991. 4. The fourth element includes capital expenditure the individual incurs for the purpose or the expected effect of increasing or preserving the assets' value or that relates to installing or removing the asset. 5. The fifth element includes capital expenditure the individual incurs to preserve or defend their title or rights to the asset (section 110-25 of the ITAA 1997). | Detailed Reasoning - Costs of subdivision: When land is subdivided, the cost base of the original asset is apportioned between the newly-created assets. Taxation Determination TD 97/3 explains that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks. A reasonable apportionment of the cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case. For example, if one block has an uninterrupted ocean view it may be worth more than the other block that does not. 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 - Application to your circumstances: In your case, only % of your interest in the property is a post-CGT asset (in each block), therefore only % of the market value at the time you acquired the post-CGT interest (acquisition date in the 20VV-WW financial year) can be included in the first element of the cost base. The second element of the cost base can include 100% of the incidental costs you incurred when you acquired the % interest in the 20VV-WW financial year. Only % of the costs in the third, fourth and fifth elements can be included in the cost base. After subdividing the land, you will have a % pre-CGT interest (CGT free) and a % post-CGT interest in each of the separate blocks. You are liable to pay CGT on % of the capital gains you make on each separate block (that is not your main residence). Your capital proceeds for each separate block (that is not your main residence) will be the amount of money you receive (or are entitled to receive) as well as the market value of any other property you receive (or are entitled to receive) in consideration for the sale of each block. The cost base for post-CGT interest in each block (that is not your main residence) will be calculated using the five elements outlined above and will include: • an apportionment over each block of % of the property's market value as at the acquisition date in the 20VV-WW financial year calculated on a 'reasonable basis'; plus • an apportionment of all costs incurred to acquire your % post-CGT interest, plus • an apportionment of % of the costs of non-capital costs incurred in connection with your ownership of the property prior to subdivision, such as interest, rates and repairs, plus • an apportionment of % of the costs of subdividing the blocks, plus • % of any costs that are attributable solely to that block. | Detailed Reasoning - Market Value substitution rule: If you receive nothing in exchange for a CGT asset, for example, you give it away; you are taken to have received the market value of the asset at the time of the CGT event A1. In your case, you are required as a pre-condition of subdivision to give free of charge a portion of your land to the Crown. This is considered a CGT event A1 because there is a transfer of ownership title. You will be taken to have received % of market value at the date of transfer for the disposal of your % post-CGT interest in the land.