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

Ruling: Q1: Are the land and improvements considered separate assets for capital gains tax (CGT) purposes? | A1: No. | Q2: Will a CGT event occur as a result of forfeiting the initial deposit? | A2: Yes. | Q3: Did a CGT event occur in the 2013-14 financial year when the property was demolished? | A3: Yes.

Relevant facts and circumstances: You and your spouse purchased a property after 20 September 1985. The property was leased for a period then rented privately over the holiday period. At all other times the house has been used exclusively as a family weekender. You and your spouse paid a non-refundable initial deposit with a view to rebuilding the holiday home. Some weeks later a decision was made not to proceed and the initial deposit was forfeited. Your spouse gifted you their share of the property. The house, including fittings and fixtures, was demolished in the 2013-14 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-55 | Income Tax Assessment Act 1997 section 108-55

Reasons for decision: Summary: A building or structure on land that you acquired on or after 20 September 1985 is taken to be a separate CGT asset from the land if one of the balancing adjustment provisions applies. The common law principle is that anything attached to land becomes part of the land. However, the exception to this principle is set out in section 108-55 of the Income Tax Assessment Act 1997 (ITAA 1997). Broadly, a building will be treated as a separate asset from the land to which it is affixed if the building is a depreciating asset for which a balancing adjustment must be worked out on sale, or the building is a post CGT asset and the land to which it is attached is a pre CGT asset (acquired before 20 September 1985). In this case, the property is not covered by the balancing adjustments provisions, nor was the land acquire pre CGT, therefore the building will not be treated as a separate asset. | Detailed Reasoning - Forfeited deposit: You can only make a capital gain or loss when a CGT event happens to a CGT asset you own. Taxation Ruling TR 1999/19 deals with the treatment of forfeited deposits. When an individual signs a contract to purchase property, they acquire a CGT asset in the form of a contractual right to a transfer of the property (the contractual right). When a contract for the sale of real estate is not proceeded with and a deposit is forfeited by a defaulting purchaser, Taxation Ruling TR 1999/19 specifies that either CGT event C1 or C2 happens to the contractual right acquired by the defaulting purchaser when the contract was entered into. CGT event C2 happens when your ownership of an intangible CGT asset (such as contractual rights) ends. The time of the event is when you enter into a contract that results in the asset ending or, if there is no contract, when the asset ends. There are a number of ways such an asset can end, including being abandoned, surrendered or forfeited. If the circumstances are voluntary, then it is considered there is a surrender, abandonment or forfeiture of the contractual rights and CGT event C2 is the more specific CGT event. In this case, you paid a deposit with a view to rebuild the holiday home. A few weeks later you decided not to proceed and you forfeited the deposit. The decision to withdraw from the contract was a voluntary one. Accordingly, we consider that the most appropriate CGT event that can be applied to your circumstances is CGT event C2. | Detailed Reasoning - Demolition: CGT event C1 happens if a CGT asset you own is lost or destroyed. As discussed in question 1, the dwelling was not a separate CGT asset because none of the balancing adjustment provisions in subsection 108-55(1) of the ITAA 1997 applied to it. However, the note to subsection 104-20(1) of the ITAA 1997 makes it clear that CGT event C1 can apply to part of a CGT asset. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property. Therefore, when the dwelling was demolished, CGT event C1 occurred.

Authorisation Number: 1012610431339: The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.