Private ruling: Capital gains tax
Published: May 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the Trust liable for capital gains tax (CGT) on the sale of the land? | A1: No.

Relevant facts and circumstances: The Trust owns land which was purchased prior to 20 September 1985. The land has remained vacant during the entire ownership period. There have never been any residential or commercial buildings on the land. The land was subdivided into X separate blocks. The Trust has spent over $Y in fees for the subdivision and improvement to road works and fencing. Approximately $Z relates to improvements that were carried out on all blocks. All of the blocks have been used for commercial rental purposes since the subdivision. A government agency advised that they would have to make a compulsory acquisition of one of the blocks plus a small portion of another block. Sale of the land was completed in the 2012-13 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 subsection 108-70(2) | Income Tax Assessment Act 1997 section 120-20

Reasons for decision: Summary: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. | Detailed Reasoning - Subdivision: If 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 if you retain ownership of the subdivided blocks. Therefore, when the subdivision took place there was no capital gains tax event in relation to the land. The land held by the trust remained a pre CGT asset. | Detailed Reasoning - Capital improvements: Under subsection 108-70(2) of the ITAA 1997, a capital improvement to a CGT asset that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is more than the improvement threshold for the income year in which the event happened and more than 5% of the capital proceeds from the event. The value of the improvements made to each block of land was significantly less than the improvement threshold for the relevant year. Therefore, the improvements will not be treated as separate assets for CGT purposes. In this case, as the land was acquired prior to 20 September 1985, any capital gain on the disposal of the asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.