CGT:
subdividing land
Q. My clients (a young couple) bought a block of land in
joint names 2 years ago with the intention of building a home on
it (which never happened). However, they are no longer a couple
and now wish to subdivide the land and take a lot each. What are
the CGT consequences of this?
No CGT on
subdivision
A. The act of subdivision alone has
no CGT consequences. This is because it does not trigger a CGT
event (as there is no change in ownership of the land).
CGT
triggered on transfer of interests in the subdivided land
In order for
the couple to obtain a 100% interest in one subdivided lot each (ie
to take a lot each in their own name) there will need to be a
transfer of interests in the subdivided land - and these
transfers will trigger CGT.
Specifically,
each party will have to transfer their interest (effectively one
quarter of the whole block) in one of the subdivided lots to the
other for this to occur.
Accordingly, CGT event A1 will apply on the disposal of one of
the party's interests in one of the subdivided lots to the other
- with the capital proceeds for this disposal being the market
value of the interest they receive in return (ie the market value
of the other party's interest in the other subdivided lot that
is transferred). If that market value is greater than the value of
the equivalent interest at the time of acquisition, each party
will have a capital gain - subject to calculation adjustments for
matters such as incidental costs of acquisition and disposal (eg
share of stamp duty and conveyance lawyer costs) and any
non-capital cost of ownership (eg interest). Any capital gain will
then be entitled to the 50% CGT discount (subject to applying any
capital losses first).
Example
Stuart and Jenny bought a block of land as joint-tenants in
2006 for $100,000. The land today has a market value of $160,000.
They now wish to subdivide the land and take a lot each.
After
subdivision occurs, Stuart will be required to transfer his half
interest in one of
the subdivided lots to Jenny. The capital proceeds he receives for
this disposal will be the market value of Jenny's half interest
in the other subdivided lot that is transferred to him in return.
All other things being equal, Stuart's half interest in one of
the subdivided lots will have a cost base of $25,000 (ie half of
one of the subdivided lots with its cost base of $50,000).
The market value of the land transferred to him in return will be
$40,000 (ie half of the other subdivided lot with its market
value of $80,000). As a result, Stuart will have a "prima
facie" capital gain of $15,000. The same will hold true for
Jenny. Note that
adjustments may have to be made for matters such as the incidental
costs of transfer and acquisition, any non-capital costs of
ownership and the CGT discount.
It is also worth noting that the main residence exemption
cannot apply because a main residence was never built on the land.
In addition, there is no specific rollover relief available for
the transfer of interests in the land in these circumstances.
This issue
appeared recently in Thomson
Tax Q&A. Thomson Tax Q&A is issues-based
and uses actual scenarios confronted in practice to help you
understand how developments affect your client's tax position.
New Q&As are added regularly and the answers provided online
are updated to take into account tax changes that impact on the
issues raised.
It therefore provides
an up-to-date database of real solutions to actual tax issues
facing tax advisers in practice.
To find out
more,
click
here.
Return to TOP
|
