Private ruling: Capital improvement (development approval) to pre-CGT asset
Published: September 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: 1. Does your residential property ('Property') acquired prior to 20 September 1985 retain its pre-CGT status? | Yes. | 2. Does the fact that a family business was carried on at your Property change its status as a pre-CGT asset? | No. | 3. Would the sale of your Property in its present unimproved state attract a capital gains tax liability? | No. | 4. Would your obtaining of council building permits to construct apartments on your Property change the Property's status as a pre-CGT asset? | No. | 5. Would the obtaining of the above mentioned council building permits be a CGT event? | No. | 6. Would the building permits create a separate post-CGT asset that would be subject to capital gains tax when disposed of? | No.

Relevant facts and circumstances: Prior to 20 September 1985, you purchased your Property, which served both as your private residence and a place of a business (your family conducted at the rear). There has been no change in the underlying ownership interests since the purchase. To maximise your property's resale value, you have engaged a town planner, a property surveyor and a heritage architect to prepare plans for building permits from the local council to construct multi-level apartments on the Property. Your intention is to sell the Property with building permits in place. The estimated cost of obtaining the building permits is up to $90,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-5 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 108-70 | Income Tax Assessment Act 1997 Section 108-85 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 149-10

Reasons for decision: Summary: Section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides an asset is a 'pre-CGT asset' if the owner acquired the asset before 20 September 1985 and, it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset. Subsection 104-10(5) of the ITAA 1997 provides a capital gain or capital loss you make is disregarded if you dispose of a pre-CGT asset. Subsection 108-70(2) of the ITAA 1997 provides a capital improvement to a pre-CGT asset (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base (assuming it were a separate CGT asset) when a CGT event happens (except one that happens because of your death) in relation to the original asset pre-CGT is: (a) more than the improvement threshold for the income year in which the event happened; and (b) more than 5% of the capital proceeds from the event. Section 108-85 of the ITAA 1997 states the improvement threshold for the 2013/14 income year is $136,884. CGT Determination TD 5 provides post 19 September 1985 capital improvements to any pre-CGT asset include intangible (non-physical) improvements, for example, improvements such as council approval to rezone and subdivide land. In the Full High Court of Australia case of Dampier Mining Company Limited v. Federal Commissioner of Taxation 81 ATC 4329, Gibbs CJ at p 4331 stated: "An improvement on land is an operation done on land which has the effect of enhancing its value". Therefore, in past decisions, when considering subsection 110-25(5) of the ITAA 1997, which is about expenditure incurred to enhance the value of a CGT asset, the Commissioner has ruled: The costs incurred in obtaining council approval were incurred by the taxpayer to increase the value of the land - the taxpayer believed that a prospective purchaser might be prepared to pay more for land that they knew could be subdivided. … demolition costs can be included in the cost base of the land…the expenditure will fall within subsection 110-25(5) of the ITAA 1997…even if the demolition costs are incurred merely to facilitate the construction of another building. Section 104-5 of the ITAA 1997 lists a summary of the CGT events. It includes section 104-35, which provides CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. In your case, as there has been no change in the underlying ownership of your Property since your purchase of it, your Property is a pre-CGT asset, which will not attract capital gains tax if sold in its unimproved state. The fact that a family business was carried on at your Property does not change its status as a pre-CGT asset. Your obtaining of a building permit will not be a CGT event, since you have merely acquired an asset (a right) rather than created a right in another entity. Also, even though your building permit is for building rather than subdivision, your building permit will be a capital improvement, since a prospective purchaser might be prepared to pay more for your Property (land) with it. Your building permit will not create a separate post-CGT asset since its estimated cost (up to $90,000) will not be more than any relevant improvement threshold under section 108-85. It follows the building permit will form part of your pre-CGT asset and will not be subject to capital gains tax when disposed of.