Saturday 11 June 2011

E-Tax Advice letter

19 May 2011


Mr Scott Tracey
47 Preston Avenue
FIG TREE POCKET QLD 4068                     
Dear Mr Tracey,
RE: TAX ADVICE RELATING TO LAND SUB-DIVISION AND SALE

The purpose of this letter is to advise you as to whether or not certain events carried out at your land at Clayfield have any associated tax implications with regards to Capital Gains Tax (CGT) legislation as well considering any associated Income Tax implications.
Firstly with regard to the subdivision of land in August 2007 constituting a CGT event there are a few different considerations that must be made before a definitive answer can be given. Normally a primary residence is exempt from CGT according to section 118-110 of the Income Tax Assessment Act 1997 (ITAA). This rule specifically applies when the taxpayer is an individual and the dwelling itself was the taxpayer’s main residence for the entire tax year. The subdivision of the land into two equal parts (0.8 hectares each) does not constitute a CGT event in itself. This is because according to section 118-120 of the ITAA (1997) the main residence exemption for a taxpayers primary dwelling can also extend to adjacent land as long as it is close or near the dwelling, is used for private/domestic purposes, the land does not exceed 2 hectares and that the land and dwelling must be sold under the same contract.
However with regard to the sale of Block B in July 2009, there will be CGT implications associated with the sale as a result of it being sold exclusively without the sale of Block A attached to it, as previously mentioned there will be no CGT exemption relating to this sale. Therefore the tax calculations for this sale are as follows. Firstly the cost base of the asset must be established, this comprises of mainly five elements that relate to the costs associated with acquiring the CGT asset which are detailed in section 110-25 ITAA (1997).




Sale Price
Cost of the land
$275,000
$150000
50% of the $12000 stamp duty and legal fees on the purchase
$6000
Cost of connecting water and drainage
$2,000
Legal fees on sale
$3,000
Total
Gross Capital Gain
$161,000
$114,000
By subtracting the cost base from the sale price gives a preliminary capital tax gain of $114,000. Considering that the asset has been held for more than 12 months and was acquired after September 1999 the discount method can be used to offset the amount of taxable capital gains income. Therefore the amount of $114,000 would be reduced by 50% to a total capital tax gain of $57000. This amount would of course need to be added onto any other gain or loss accrued relating to another CGT assets for the applicable tax year.
Finally with regard to whether or not the sale of Block A in May of 2010, constitutes a CGT event the answer is no. This is because the asset is exempt according to section 118-120 of the ITAA (1997). The rule specifically mentions that because it is a primary residence it therefore does not carry any CGT implications. With regard to income tax implications there would be no associated implications due to this transaction.
Therefore to summarise, the subdivision of land in 2007 does not in itself constitute a CGT event which of course carries no tax implications. However the sale of Block B in 2009 does have tax implications and a figure of $57000 will need to be included in your tax return under the appropriate CGT section. Finally the Sale of Block A does not have any tax implications as previously mentioned above.
Yours sincerely,

William Dodd
Consultant

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