CGT on Subdivision

Question

I posted this on Property investing last night and was told to contact you more more advice.

We purchased a property in 1998. This was our PPOR till early 2007. We demolished our PPOR and subdivided the land into two lots. We refinanced and built a new house on one of the blocks and made it our PPOR again. This left us with one block spare,which we recently sold. I enquired about CGT, the ATO said that I must calcluate the buying price in 1998 ($125,000) remove the value of the old PPOR house (say $50,000). Based on 1998 prices this left us with the land worth $75,000. Subdivided- each block is worth $37,500. ATO say I must pay capital gains from $37,500 to the recent sale price which is $200,000. That is a hugh CGT bill for us. I just dont understand how they can back date investments like that? I would have thought it would be from the 2007 subdivision value till it was sold. Is there anything that can be done to avoid this? If that is the case, I feel sorry for people who bought in the 1970’s and wish to subdivide now. Look forward to your response.

Answer

People who bought in the 1970s have it great no CGT. You have a very good argument for including in the cost base of the property before subdivision the original cost of the house and the demolishing costs and then splitting this in half to come to the cost base of the land once it was subdivided. Refer ID 2002/514 which says demolition expenses are included in the costs base and TD 1999/79 which states that if money is not received for the demolition (i.e. an insurance claim) then the whole event is ignored this means that the original cost of the building remains as part of the cost base of the land refer ID 2002/633 and subsection 112-30(5) ITAA 1997. Don’t let them tell you that there is any loss of your main residence exemption on the new house either. You can utilise section 118-150 ITAA 1997 to cover it with your main residence exemption during the rebuilding stage.

Don’t forget to include in the cost base its share of the subdivision costs.
What the ATO also neglected to tell you is that because you purchased the property after 20th August, 1991 you are entitled to include in the cost base any costs associated with holding the property during the whole period of ownership, that you have not been able to claim as a tax deduction. This includes interest, rates, insurance, lawn mower, even maintenance re the demolished house ie cleaning materials, light globes etc, the list goes on. How good was your record keeping?

You are entitled to the 50% discount because the 12 months starts from 1998 not the date of the new title

Unfortunately the ATO is right in saying that there is absolutely no main residence exemption on the vacant block. I have recently been through the same scenario myself and looked at all sorts of ways around it including selling the combined blocks to another entity as my main residence then selling the vacant block and buying back my home but the stamp duty costs where greater than the CGT.

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