Private ruling: Capital gains tax - deceased estate, subdivision, construction of new dwelling and disposal
Published: February 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1:  | A1:  | Q2:  | A2: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your parent A acquired a vacant block of land (the property) solely in their name in 19XX. Your parents constructed a dwelling on the vacant land. Your parents moved in and established the property as their main residence. Your parent A passed away in mid 19XX. Your parent B acquired the property from your parent A upon their death Late 2010 your parent B moved into an aged care facility. The trustee of the estate has elected to treat the property as parent B's main residence during their absence. Your parent B passed away on late 2011. Probate has been granted. You and your siblings inherited an equal interest in the property. The title of the property will be transferred into the beneficiaries' names within two years of your parent B's death. You and your siblings will demolish the existing dwelling and subdivide the land into three lots. You and your siblings will receive no capital proceeds from the demolition of the existing dwelling. You will acquire one of the subdivided blocks of land. You will construct a dwelling on the vacant land and then dispose of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 104-20 | Income Tax Assessment Act 1997 Section 112-20

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The most common capital gains tax (CGT) event, CGT event A1, occurs when you dispose of CGT asset, the time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs. CGT event A1 will occur upon the disposal of the subdivided block of land and dwelling. | Detailed Reasoning - Deceased estate: Any capital gain or capital loss you make from a CGT event that happens to a dwelling, that was their main residence when they died, that has passed to you as the executor or beneficiary of a deceased estate is disregarded if the deceased acquired the dwelling after 20 September 1985 and you dispose of your ownership interest in it within two years of the deceased death. However, this exemption only applies to a dwelling. Where the dwelling is intentionally demolished and the vacant land is disposed of, no exemption is available on the disposal of the land. If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base. The first element of the cost base and reduced cost base of a dwelling is its market value at the date of death where the dwelling passed to you after 20 August 1996, and it was the main residence of the deceased immediately before their death and it was not being used to produce assessable income. Upon the death of your parent B you acquire your interest in the property at its market value on your parent B's date of death. | Detailed Reasoning - Demolition: If a CGT asset you own is lost or destroyed, CGT event C1 happens. This event can also apply if part of an asset is lost or destroyed. According to Taxation Determination TD 1999/79 (enclosed), CGT event C1 can happen on the voluntary destruction of an asset, for example you demolish an existing dwelling in the course of re-developing a property. A CGT event will happen to part of your asset so you are required to apportion the cost base or reduced cost base between the land and the dwelling according to the CGT apportionment rules. You make a capital gain from CGT event C1 happening if any capital proceeds you receive from the demolition of the dwelling are greater than the cost base of that part of the CGT asset represented by the dwelling. You will make a capital loss if the proceeds are less than the reduced cost base. As you will receive no capital proceeds from the demolition of the dwelling, the market value substitution rule does not apply to CGT event C1. Therefore, the effect of this is that no cost base amount is apportioned to the cost base/reduced cost base of the dwelling. | Detailed Reasoning - Subdivision of land: Subdivision itself is not a CGT event. Therefore, the acquisition date of the subdivided blocks will be the date of the deceased death. The cost base of the land is apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 97/3 (enclosed) provides that the Commissioner will accept any reasonable method of apportioning the cost base between the new blocks, for example, on an area basis or a relative market value basis. The actual costs of subdivision should also be apportioned between the three blocks. If the blocks are of unequal market value the Commissioner considers that costs such as surveying, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market values of the blocks. However, any costs solely related to one lot, such as connection of water or electricity should be attributed solely to the cost of that lot. In your case, the costs incurred in the construction of the dwelling will form part of the cost base of the land to which it relates and should be attributed solely to that block. Transfer of ownership of subdivided blocks to beneficiaries Each beneficiary has an equal interest in the vacant subdivided blocks. Upon the transfer of one of the subdivided blocks into your name a CGT event A1 will occur as there will be a change ownership in a number of the interests from the other beneficiaries' names solely into your name. As you did not incur any expenditure to acquire these interests, the first element of the cost base and reduced cost base of these interests will be its market value at the time it is transferred into your name. | Detailed Reasoning - Disposal of the subdivided lot: CGT event A1 will occur upon the disposal of the land and dwelling that has been subdivided. 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. You can use the discount method to calculate your capital gain if: o you are an individual o a CGT event happens to an asset you own o the CGT event happened after 21 September 1999 o you acquired the asset at least 12 months before the CGT event, and o you did not choose to use the indexation method. The discount percentage is 50% for individuals. For further information on these methods on how to calculate your capital gain or capital loss please refer to the enclosed information which has been taken from Guide to capital gains tax 2010-11 (NAT 4151-6.2011) .

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: Capital gains tax - deceased estate, subdivision, construction of new dwelling and disposal: Question 1: Upon subdivision of the land, is the cost base of the original land apportioned on a reasonable basis between the subdivided blocks? | Question 2: Is the capital gain or capital loss made on the disposal of the subdivided land and dwelling disregarded?