Private ruling: Capital gains tax - tenant in common - subdivision - main residence exemption - absence choice
Published: June 2012
Ruling period: Year ended 30 June 2012. | Year ended 30 June 2013. | Year ended 30 June 2014.
Date scheme commenced: On or after 1 December 1987.

Ruling: Q1: Will a CGT event happen on transfer of your interest (vacant land) to Person A and Person B? | A1: Yes. | Q2: Is any capital gain resulting from the transfer of your interest (vacant land) to Person A and Person B disregarded? | A2: No. | Q3: Will any capital gain or capital loss made on the disposal of the 'old house' and 1.5 hectares of adjacent land be disregarded? | A3: Yes.

Relevant facts and circumstances: You and your spouse together with Person A and Person B purchased a property as tenants in common, (each owning a 25% interest in the whole of the property, being no specific part) known as the (original property). The date of settlement of the acquisition of the 'original property' was sometime after 20 September 1985. The land area of the 'original property' was more than two hectares and it contained a dwelling referred to as the 'old house' which you and your spouse lived in as your main residence since the acquisition time until you built a new dwelling on the land many year later, which you refer to as the 'new home'. Person A and Person B have never lived on the property. The land has been re zoned to permit subdivision for urban development, however as an initial step you plan to partition (subdivide) the 'original property' into two lots of equal land area size. You will then cross transfer your interests, so that you and your spouse become tenants in common (each owning a 50% share, being no specific part of the one half of the property, that contains the 'old house' and the 'new home' that was built more than fifteen years later). Person A and Person B will also cross transfer their interests so that they become tenant in common owners, (each owning a 50% share, being no specific part) of the other half of the 'original property' which happens to be vacant land. You state that the partitioning, (sub-division) will not attract any State duties because the individual beneficial interests in the land do not change. In summary, you and your spouse will own one half of the 'original property' which contains both the 'old house' and the 'new home' and Person A and Person B will own the other half of the 'original property' which is vacant land. You and your spouse will then sell a larger fraction of your half of the 'original property' including the dwelling known as the 'old house'. You will continue to own the remaining smaller fraction of your half of the 'original property' that contains the 'new home' which you live in. The 'old house' has not been rented out and will continue to remain vacant. You have chosen to continue to treat the 'old house' as your continuing main residence from the time you moved out into the 'new home' until your ownership interest ends, (that is until settlement for the sale of the 'old house' and the adjacent larger fraction of land, which is less than two hectares in size, (you have made an absence choice).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 115-5 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-125 | Income Tax Assessment Act 1997 Section 118-130 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-165

Reasons for decision: Summary: A CGT event will happen on transfer of your interest (vacant land) to Person A and Person B. | Detailed Reasoning - Tenants in Common: Tenancy in common means that two or more parties own the property and their respective interests are specified. Tenancy in common arrangements have the following characteristics: · The interests of the co-owners as tenants in common need not be equal or identical; · Tenants in common must return income and expenses according to their ownership share in the property; · Each party's interest is documented on the title deed; and · Any agreement (whether written or oral) which purports to vary this basis of distribution or ownership will not be effective for tax law purposes. In your circumstances, you are the legal owner of a fractional interest in the 'original property' which is greater than two hectares, (being no specific part). | Detailed Reasoning - Sub-division: When you partition (subdivide) a block of land, being one asset, (the original asset) into two or more assets, (new assets) and you are the beneficial owner of the original asset and each new asset, the splitting or change is not a CGT event. | Detailed Reasoning - Cross transfer of interests: However in your circumstances you are not just partitioning (subdividing) the 'original property' into two; you are also cross transferring your ownership interests, between you and your spouse and Person A and Person B so that instead of having a fractional ownership interest as a tenant in common of the 'original property', you will have double the ownership interest of half of the 'original property'. You will dispose of a fractional ownership interest of the 'original property' which is vacant land to Person A and Person B. This means that CGT event A1 will happen when you transfer your fractional ownership of vacant land to Person A and Person B. Note: You will have two ownership interests in your share of your half of the 'original property' as follows: · Fractional share acquired on the date the 'original property was first acquired; and · Fractional share acquired when the cross transfer, (or exchange) of interest happens from Person A and Person B. This will affect any CGT calculations because the two separate ownership interests will have different cost bases. | Summary: Any capital gain resulting from the transfer of your interest (vacant land) to Person A and Person B will not be disregarded. | Detailed Reasoning - Detailed reasoning: Any capital gain resulting from the disposal of vacant land that has been acquired after 20 September 1985 and is not disposed of with a dwelling (that qualifies for a full main residence exemption) is not disregarded. In your case you acquired the 'original property' after 20 September 1985; you have sub-divided the 'original property' and will dispose of an ownership interest in vacant land by transfer to Person A and Person B. | Summary: Any capital gain or capital loss made on the disposal of the 'old house' and adjacent land that is less than two hectares will be disregarded. | Detailed Reasoning - Main residence exemption: You can only claim the full main residence exemption where all of the following are satisfied: There was a dwelling on the property when you sold it; · the dwelling was your main residence for the whole of your ownership period; · you did not choose to treat any other dwelling as your main residence under the capital gains tax provisions during your ownership period; · the property is less than two hectares in size; and · the property was not used to earn assessable income while you resided there. In your circumstances you can claim the full main residence exemption in relation the dwelling known as the 'old house' and the adjacent land which is less than two hectares from the time that you acquired the property until you moved into the 'new home'. | Detailed Reasoning - Continuing main residence status after dwelling ceases to be your main residence: In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence. If you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you cease living in it. Where you use the dwelling to produce income, you can choose to treat it as your main residence while you use it for that purpose for up to six years after you cease living in it. You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be, your main residence. If you make this choice, you cannot treat any other dwelling as your main residence for that period. In your circumstances, the dwelling known as the 'old house' was your main residence and you have chosen to treat the 'old house' as your continuing main residence (made the absence choice). The property has and will not be used to produce income during your ownership period therefore you can treat the 'old house' as your continuing main residence indefinitely. Note: This will mean that you cannot treat your 'new home' as your main residence during the time that you treat the 'old house' as your continuing main residence. | Summary: As a result of the 'old house' either being your main residence or continuing main residence for your entire ownership period, any capital gain or capital loss made on the disposal of the 'old house' and adjacent land that is less than two hectares in size will be disregarded.

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