Private ruling: CGT subdivision and Main Residence
Date of advice: 16 November 2015
Published: November 2015
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will a capital gains tax (CGT) event occur for W and X when they dispose of their interest in lot B and become sole owners of lot A? | A1: Yes. | Q2: Will a CGT event occur for Y and Z when they dispose of their interest in lot A and become sole owners of lot B? | A2: Yes.

Relevant facts and circumstances: Together you purchased the property. You are all on the title to the property. Two residences were built on the land. W and X moved into one and Y and Z moved into the other. All utilities are addressed to and are the responsibility of each residence. The rates for the property are billed jointly as it is deemed to be one property by the local council. You all share a PO Box to have your mail delivered to as Australia Post doesn't deliver mail to your actual residences. The subdivision of this property has been initiated but is yet to be finalised. W and X will become the sole owners of lot A. Lot A will contain the dwelling that has been W and X's main residence. Y and Z will become the sole owners of lot B. Lot B will contain the dwelling that has been Y and Z's main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-7 | Income Tax Assessment Act 1997 section 118-100

Reasons for decision: Summary: Under section 102-20 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). Under section 118-100 you are able to disregard the CGT loss or gain you make from a CGT event to a dwelling that is your main residence. In this case W, X, Y and Z hold the title to the property jointly. For CGT purposes it is treated as if W, X, Y and Z own equal shares of the property. When the subdivision of the property into lots A and B does occur W, X, Y and Z will all hold ownership interest in both lots. Meaning that W and X will jointly hold a 50% interest in lot A and lot B; and Y and Z will jointly hold a 50% interest in in lot A and lot B. Although the act of subdividing the land does not trigger a CGT event, when a transfer occurs so that W and X become sole owners of lot A, they will be disposing of their interest in lot B. Similarly, when Y and Z become sole owners of lot B, they will be disposing of their interest in lot A. Accordingly, a CGT event will occur when W and X dispose in their interest in lot B and Y and Z dispose of their interest in lot A.