Private ruling: Capital gains tax - disposal of vacant land
Published: June 2012
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Does CGT apply on the sale of your vacant land? | A1: Yes. | Q2: Are you entitled to a main resident exemption? | A2: No.

Relevant facts and circumstances: You and a friend purchased a house and land. The properties were purchased as two separate blocks with one title deed in your name and the other title deed in your friend's name. The house was built across both blocks of land. You and your friend lived in the house as your main residence. You went overseas. Wile you were overseas your friend demolished the house and built a new house on their block leaving yours vacant. You opposed the demolition and expressed this to your friend. They went ahead and did this anyway. You sold the vacant block of land. You received no compensation for the demolition.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income tax Assessment Act 1997 section 104-20 | Income tax Assessment Act 1997 paragraph 108-5 Income Tax Assessment act 1997 subsections 112-30 | Income tax Assessment Act 1997 subsection 118-120

Reasons for decision: Summary: Section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event C1 happens if a CGT asset you own is lost or destroyed. As an asset includes part of an asset (paragraph 108-5(2) (a)), CGT event C1 can apply to part of an asset. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset, for example where a taxpayer might demolish a building in the course of redeveloping a property. The demolition of your house would fall within the concept of 'destruction' for the purpose of CGT event C1. As you received no compensation for the loss or destruction of the asset, CGT event C1 happens when the loss was discovered or the destruction occurred. As CGT event C1 happened to only part of your asset, you are required to apportion the cost base and reduced cost base between the land and the demolished dwelling using the apportionment rules in subsections 112-30(2), (3) and (4). Because you received no capital proceeds from the destruction of the house, the combined effect of these provisions is that no amount is apportioned to the cost base or reduced cost base of the demolished dwelling. Subsection 104-20(3) provides that you make a capital gain from CGT event C1 if the capital proceeds from the loss or destruction are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. As no capital proceeds were received `for the demolished dwelling, and as no amount is apportioned to the cost base or reduced cost base of the dwelling, you do not make a capital gain or capital loss on the disposal of the demolished dwelling. CGT event A1 happened when the vacant block of land was sold (subsection 104-10(1)). The time of this event was the time you entered into the contract for the disposal. You will make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. The main residence exemption is not available in respect of any capital gain or loss that you make from the disposal of the block because the land will be sold separately from a main residence: see subsection 118-120(1) of the ITAA 1997. | Detailed Reasoning - Cost base: The cost base of a CGT asset is generally the cost of the asset when a taxpayer bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. In order to work out how much a taxpayer's capital gain or capital loss is, a taxpayer must first establish the cost base or reduced cost base of a taxpayer's ownership interest in the property. Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements. | Detailed Reasoning - Money or property given for the asset.: Incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant. A taxpayer does not include costs if a taxpayer: · have claimed a tax deduction for them in any year, or · omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired. Non-capital costs of ownership of the CGT asset, which include: · Interest on money borrowed to acquire the asset; and costs of repairing, maintaining, or insuring it; and · Interest on money a taxpayer borrowed to refinance the money a taxpayer borrowed to acquire the property; and · Interest on the money a taxpayer borrowed to finance the capital expenditure a taxpayer incurred to increase the assets value. Capital expenditure that a taxpayer incurred to increase the assets value. Capital expenditure a taxpayer incurred to establish, preserve or defend a title to the asset, or a right over the asset. The 50% discount method can be used as you held the asset for more than 12 months.

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