The following example illustrates this scenario:

- Bob acquired a dwelling in August 1996 for $400,000, which was his main residence.

- The land is less than two hectares.

- In September 2012, the property was subdivided into two blocks with one block containing the dwelling (front block) and the other block being vacant (rear block). Bob continued to be the owner of both blocks.

- The legal costs for the subdivision were $10,000.

- At the time of subdivision, Bob's real estate agent advised that the value of front block and rear block be split 50/50.

- The rear block was sold in December 2014 for $400,000.

Again, the mere subdivision does not trigger a CGT liability provided Bob continues to be the owner of both, and the new cost base of each will need to be apportioned on a reasonable basis. However as the split, based on the real estate agent's advice, is 50/50, the cost base for each block is as follows:

Acquisition cost

(50% of $400,000)...................... $200,000

Legal fees (50% of $10,000)........... $5,000

Cost base per block................... $205,000

For its part, the ATO has indicated in various rulings that situations similar to Bob's would not necessarily result in an "enterprise" for GST purposes. For income tax purposes, it follows that the ATO would likely consider that Bob has disposed of the land by way of "mere realisation" as opposed to realising a gain from a profit-making undertaking.

Accordingly, the sale of the vacant block would be on capital account and the CGT general discount would be available if the asset is owned for at least 12 months. Therefore the net capital gain to Bob from the sale of the rear block is $97,500 (that is [$400,000 less $205,000] x 50% general discount).

However the net capital gain on the sale of the vacant land would not attract the operation of the main residence exemption. As a general rule, adjacent land would be subject to the exemption if it was primarily used for private and domestic purposes in association with the dwelling. However the exemption only applies if the land and dwelling are sold together. As a result, the net capital gain of $97,500 would remain assessable to Bob.

Question:

1. How you believe the $97500 Net Capital Gain was arrived at (and of course the vendor taxpayer will need to pay his/her marginal income tax rate plus Medicare levy on this).
2. Whether this is a fair outcome when the vendor loses the main residence exemption on the piece of land sold off despite the fact that the land sold off for many years was part of the family home/land package.

Answer rating: 100% (QA)

The answer to this question shows the unfair ness in the ... View the full answer