Private ruling: Capital gains tax – land subdivision – main residence exemption – deed of partition – transfer of title
Date of advice: 6 September 2017
Published: December 2017
Ruling period: Year ended 30 June 201D. | Year ended 30 June 201E.
Date scheme commenced: 1 July 201C.

Ruling: Q1: Will a capital gains tax event occur when a deed of partition is created to indicate individual ownership of Unit A to you and Unit B to your sibling? | A1: No | Q2: Can the market value of Unit B as at the time of subdivision be used when the property was subdivided for calculating the capital gain or capital loss made on the transfer of your ownership interest in Unit B? | A2: No | Q3: Will Unit A be your main residence for capital gains tax purposes from the date of partitioning providing Unit A is used as your main residence from that date? | A3: No | Q4: Can you claim a full or partial main residence exemption under section 118-110 or 118-185 of the Income Tax Assessment Act 1997 on the transfer of your interest in the Unit B to your sibling? | A4: No | Q5: Can you claim a full main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 on the sale of the Unit A after you obtain full ownership of the dwelling? | A5: No

Relevant facts and circumstances: Between 199A and 200B you resided in a number of rental properties. After 19 September 1985 you and your sibling purchased the property (the Property). You and your sibling jointly borrowed money and were both placed on the title to the Property as joint owners. The Property had a rundown dwelling located on it when it was purchased. You and your sibling decided to demolish the dwelling and build two new units on the Property, one unit for you to live in and the other unit for your sibling to live in. As you and your sibling had never constructed a building before it took longer than expected to have the drawings prepared, all necessary permits and consents obtained from the council, employ a builder and to obtain finance for the construction of the units. The dwelling was never rented out before it was demolished and had remained vacant. Over four years after the purchase of the property the dwelling was demolished and construction of the two new units occurred. When the construction of the two new units was completed you and your sibling moved into the units as follows: ● Unit B being the main residence of your sibling and ● Unit A being your main residence. You and your sibling have continued to reside in the units until the present time. Since you commenced living in the units you and your sibling have paid separate property expenses including gas, electricity and water. Over a decade after the purchase of the Property, the Property was subdivided into two titles to recognise the two different units. After subdivision you remained joint owners of each individual parcel of land and the units located on the subdivided lots. You and your sibling were subsequently advised to create a deed of partition to transfer the units to show sole ownership. A draft partition has been prepared. You intend to partition and transfer the titles to indicate sole ownership ● Your sibling being the sole owner of Unit B and ● You being the sole owner of Unit A. For the purposes of this ruling you and your sibling will transfer your ownership interests to each other, with you transferring your share in Unit B to your sibling and your sibling transferring their share in Unit A to you.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-150

Reasons for decision: Summary: Creating a deed of partition did not change your underlying ownership interests, and is not a capital gains tax (CGT) event. | Detailed Reasoning - Detailed reasoning: A deed of partition that has been entered into by two parties who are co-owners of a property does not create separate legal interests for each party. It may create a separate beneficial interest in each part of the property, but there is no change to the legal title or ownership of the property. In your situation, your deed of partition is more akin to a memorandum of understanding, in that you are each stating that you are responsible for a particular part of the Property being each unit. If a deed of partition is part of a document that has been court ordered by a judge as part of a court case it is likely that this would result in a change of legal title, however the change in legal title would take place as a result of the deed of partition which has been given the force of a court order. The deed of partition in itself does not change the legal title of a property. A property would need to undergo a subdivision, or a change of title to strata title to change the ownership into two separate interests. However, you should be aware that in this circumstance you would each own 50% of each other’s interest. Any restructuring of your interests could constitute a disposal of your interest under capital gains tax (CGT) legislation. | Detailed Reasoning - Conclusion: You and your sibling subdivided the Property you own into two subdivided blocks with a unit located on each block. You were unaware that this did not give you individual ownership of Unit A. Upon receiving guidance you and your sibling decided to create a deed of partition and change the titles to the blocks and units to reflect individual ownership. A deed of partition on its own does not create a capital gains tax event, as you are not changing the legal title to each parcel of land from being co-owned to individual ownership a capital gains tax event will not occur. | Summary: You cannot use the market value of Unit B as at the time of subdivision when working out your cost base as part of calculating whether you have made a capital gain or capital loss. You must use the acquisition and subdivision costs, and apportion these between the subdivided blocks. | Detailed Reasoning - Subdivision: Subdivision itself is not a CGT event. Therefore, as stated in Taxation Determination 97/3 (TD 97/3) for the purposes of calculating the cost base of the subdivided land the acquisition date will be the date that you acquired the original parcel of land. You and your sibling subdivided the property into two separate titles, each containing one unit and each title being registered in you and your sibling’s names as joint tenants. You will transfer your ownership interests in Unit B, your sibling’s main residence to your sibling. Upon transfer of title to your sibling a CGT event occurs. As stated in TD 97/3 if there has been a subdivision of the property the cost base of the subdivided land will be the date that you acquired the original parcel of land and not the subdivision date. TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the cost base between the new blocks (that is, on an area basis or relative market value basis). The costs of subdivision should 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 connecting electricity and water to the block, which is to be sold, should be attributed solely to that block). | Detailed Reasoning - Detailed reasoning: The transfer of land title will be conducted to realise the ownership rights of you in relation to your living arrangements. Generally, a dwelling is considered to be your main residence if: ● you and your family live in it ● your personal belongings are in it ● it's the address your mail is delivered to ● it's your address on the electoral roll, ● services such as gas and power are connected and ● no other property is treated as your main residence. Upon the transfer of title, each unit will be considered the main residence of the owner from the date of transfer if the owner resides in the Property and treats it as their main residence. | Detailed Reasoning - Detailed reasoning: Section 118-100 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to ignore a capital gain or capital loss you make from a capital gains tax (CGT) event that happens to a dwelling that is your main residence. Under subsection 118-110(1) of the ITAA 1997; you are eligible for the exemption if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. Partial Exemption Under section 118-185 of the ITAA 1997, a partial main residence exemption applies when a CGT event happens to a dwelling where the dwelling was the taxpayer’s main residence for only part of their ownership period. This can occur in circumstances in which the dwelling failed to qualify as a main residence throughout the ownership period such as when a taxpayer chooses another dwelling as their main residence. In this case you have a 50% ownership interest in Unit B. This unit has never been your main residence for any of your ownership period therefore you cannot claim any main residence exemption, either in full or partially, on the transfer of your 50% ownership interest in Unit B to your sibling. | Summary: You cannot claim a full main residence exemption on the sale of Unit A however as you have two different ownership interests in Unit A the following applies. On the 50% ownership interest that will be transferred to you from your sibling, you will be able to claim a full main residence exemption on the sale from the date of transfer if the unit remains your main residence. On the 50% ownership interest you acquired from your initial purchase of the Property, you will need to apportion the capital gain made in respect to the main and non-main residence periods. | Detailed Reasoning - Detailed Reasoning: If you have not treated any other dwelling as your main residence section 118-150 of the ITAA 1997 extends the CGT main residence exemption to allow you to treat land as your main residence for up to four years if you build, repair or renovate a dwelling on the land that subsequently becomes your main residence. Taxation Determination TD 2000/16 (TD 2000/16) states that: 2. If you build a dwelling on vacant land, you may choose under subsection 118-150(2) to apply the main residence exemption for the period from when you acquire your ownership interest in the land until the dwelling becomes your main residence. This period may not exceed four years before the dwelling becomes your main residence: subsection 118-150(4)). The dwelling must become your main residence as soon as practicable after work in building the dwelling is completed and must continue to be your main residence for at least 3 months: subsection 118-150(3). 3. If there is a dwelling or a partly completed dwelling on the land when you acquire your ownership interest in the land, but the dwelling is never occupied by you or someone else, the period for which you may choose to apply the main residence exemption for the dwelling is the same as in paragraph 2 of this Taxation Determination. Subsection 118-150(5) does not operate to alter the start of the period in paragraph 118-150(4)(b) for which you choose to apply the main residence exemption. Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011 amended section 118-150(4)(a) to give the Commissioner a discretion to extend this period where a taxpayer does not build, repair or renovate a dwelling and establish it as their main residence within four years. The amendment received Royal Assent on 27 June 2011 and applies to CGT events that happen after that date. The Commissioner would be expected to exercise the discretion in situations such as the following: ● When the taxpayer is unable to build, repair or renovate the dwelling within this time period due to circumstances outside their control. For example, the relevant builder becomes bankrupt and is unable to complete the building, repairs or renovations. ● When the taxpayer is unable to build, repair or renovate the dwelling due to unforeseen circumstances arising during this period. For example, the taxpayer or a family member has a severe illness or injury. ● In circumstances when building, repairing or renovating the dwelling within the four years would impose a severe financial burden on the taxpayer. For example, the taxpayer would be required to incur an excessively high level of debt relative to their income. Consequently, the taxpayer may spend time accumulating sufficient savings (relative to their income) to build, repair or renovate a reasonable dwelling relative to their circumstances. Application to your circumstances In this case, you will have two different ownership interests in Unit A. The second ownership interest in Unit A will be a 50% share that will be transferred to you by your sibling. As you will have just acquired this 50% ownership interest in Unit A a full main residence exemption can be claimed upon sale for this portion. The first ownership interest in Unit A was acquired when you originally purchased the Property with your sibling; this ownership interest is also a 50% share. You never occupied the original dwelling upon purchase and the Property was left vacant since you and your sibling acquired it. Sometime after the purchase of the Property the original dwelling was demolished and two new units were built. This process took over four years to complete and during this time you did not treat any other dwelling as your main residence. You moved into Unit A as soon as practicable after construction was completed. As discussed in TD 2000/16, you may choose to apply the main residence exemption for the period from when you acquired your ownership interest in the Property until the unit becomes your main residence if you haven’t treated any other residence as your main residence or exceeded the four year time limit for this to happen. For the main residence exemption to apply to the full ownership period of this 50% ownership interest of the Unit A you will need to get the Commissioners discretion to extend the four year time limit to build, repair or renovate a dwelling on the land that subsequently becomes your main residence. As this was you and your siblings first experience in property construction you were unprepared for the situation and it took longer than expected to have drawings prepared, all necessary permits and consents obtained, employ a builder and obtain finance for the development. You were also unaware that you needed to complete the process within four years unless there was some unforeseen or uncontrollable event/s to prevent you from doing so. As there was no unforeseen or uncontrollable event/s to prevent you from completing the build within the four year time limit, the Commissioners discretion will not be granted. Therefore your 50% ownership interest in Unit A will not be fully exempt under the main residence provisions upon sale. You will need to apportion the capital gain between the main residence period and non-main residence period.