Private ruling: Capital Gains subdividing a block
Published: May 2012
Ruling period: Year ending 30 Jun 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will there be a capital gain or loss on the demolition of the existing residence? | A1: No | Q2: Will there be a capital gain or loss on the disposal of Block B? | A2: Yes.

Relevant facts and circumstances: You and your spouse jointly acquired a dwelling and the property became your main residence after 1991. You plan to demolish the dwelling in the near future and then subdivide the land into two equal size blocks - Block A and Block B. There will be no change in beneficial ownership following the subdivision. You are seriously considering doing the following: · choose to treat Block A as your main residence from the time the demolished dwelling was last occupied · build and as soon as practicable afterwards commence living in a new dwelling on Block A within four years from when you cease to occupy the demolished dwelling · use the dwelling on block A as your main residence for at least three months and until it is sold · sell Block B as a land only asset to cover the costs of building a dwelling on Block A. There will be no capital proceeds on the demolition of the old residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 Ch3-Pt3-1-Div118-SDiv118-B | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-20 | Income Tax Assessment Act 1997 Subsection 108-5(2) | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 112-30 | Income Tax Assessment Act 1997 Subsection 116-20(1) | Income Tax Assessment Act 1997 Subsection 116-30(2) | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-150

Reasons for decision: Detailed Reasoning - Demolition of a Dwelling: Section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event C1 happens if a CGT asset owned by a taxpayer is lost or destroyed. Subsection 108-5(2) of the ITAA 1997 allows this event to happen to part of a CGT asset. The demolition of a house would fall within the definition of destruction for the purpose of CGT event C1. As the cost base and capital proceeds are nil a capital gain or capital loss would not be made. However if a capital loss was made it is exempt under section 118-110 of the ITAA 1997. This is because the dwelling would be considered to be your main residence up until its demolition. Note: If a building is demolished, there is no deemed market value consideration for the disposal that occurs as a result of the demolition. This is because the market value substitution rules do not apply where CGT event C1 occurs. | Detailed Reasoning - Subdivision of land: When you subdivide a block of land, each smaller 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 the land does not in itself change the ownership of the subdivided blocks. Therefore, you do not make a capital gain or loss at the time of subdivision. You are taken to have acquired the subdivided blocks when you acquired the original land and house. | Detailed Reasoning - Apportionment: On subdivision of the land into smaller blocks, the cost base of the land needs to be apportioned between the smaller blocks (section 112-25 of the ITAA 1997). Taxation Determination 97/3 provides that the Commissioner will accept any reasonable method of apportioning costs between different assets, e.g. area basis or valuation. Where you subdivide land, the Commissioner considers that survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market values of the blocks. The costs of connecting electricity and water, to an individual block that is to be sold, may be attributed solely to that block. | Detailed Reasoning - Sale of one block: The sale of one block results in a CGT event A1 occurring. Section 104-10 of the ITAA 1997 provides that an A1 event happens if you dispose of a CGT asset. A disposal occurs if there is a change of ownership. The time of the event is when the taxpayer enters into the contract for the sale of the property. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base and you make a capital loss if those capital proceeds are less than the asset's reduced cost base. When you sell the block you will need to work out the cost base of the block to enable you to calculate the capital gain or loss. | Detailed Reasoning - Cost base: The "cost base" consists of five elements, as set out in section 110-25 of the ITAA 1997. Briefly, these are: · Money paid or required to be paid for the land · Incidental costs of acquiring the land, or costs in relation to the CGT event, e.g. stamp duty, legal fees, accountant's advice, etc. · Non-capital costs you incur in connection with your ownership, e.g. interest, rates, land tax, repairs and insurance premiums (provided that you have not, or could not have claimed these costs as a "deduction"). You can include non-capital costs of ownership only in the cost base of assets acquired after 20 August, 1991. · Capital expenditure you incur to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event, e.g. construction costs of the new residences. · Capital expenditure you incur to preserve or defend your title or rights to the asset. The cost base of the block will be the apportioned cost base of the land plus other costs incurred as outlined above. If you have owned the subdivided blocks of land for at least 12 months, you will be able to use the discount method to reduce any capital gain you make by 50 per cent. The acquisition date of the subdivided block will be the same acquisition date of the original block of land and dwelling. | Detailed Reasoning - Capital Proceeds: Division 116 explains how to work out what the capital proceeds are from a CGT event. The capital proceeds from a CGT event are the total of the money the taxpayer has received, or are entitled to receive, in respect of the event happening; and the market value of any other property the taxpayer has received, or are entitled to receive, in respect of the event happening (subsection 116-20(1) of the ITAA 1997). The capital proceeds will be the amount received from the block. | Detailed Reasoning - Main residence exemption for the block you retain: You will qualify for a full main residence exemption for the dwelling that was built to replace a main residence that was demolished or destroyed provided you make a valid choice under section 118-150 of the ITAA 1997, and satisfy certain conditions. Ordinarily where a dwelling is demolished or destroyed and a new dwelling is constructed, the main residence usage of the first dwelling would not count towards an exemption for the new dwelling and land. However if you: · build a dwelling to replace a demolished or destroyed main residence; and · make a choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling is constructed as their main residence from the time that the demolished or destroyed dwelling was last occupied by them; and · there is not more than four years between the time the demolished or destroyed dwelling was last occupied and the time the new dwelling became your main residence The effect of making a choice under section 118-150 of the ITAA 1997 in these circumstances will be that there is an unbroken period of occupancy of a main residence on the land from the time when the first dwelling became the taxpayer's main residence and the completion of the new dwelling in which will be their main residence. | Detailed Reasoning - Joint tenants: Section 108-7 of the ITAA 1997 provides that individuals who own a CGT asset as joint tenants are treated as if they each own 50% of that asset. Accordingly, you are treated as owning 50% of the property, and are required to declare half of the capital gain (or loss) in your income tax return.

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.