Capital gain tax consequences
Enquiry:
On 1 July 2012, I purchased a block of land with a house on it for $700,000. The dwelling was used as a rental property until I decided to demolish it in July 2017. I did not receive any consideration with respect to the demolition of the existing dwelling.
Could you advise me on the CGT consequences of the demolition of property?
Explanation:
The block of land and dwelling is taken to be one CGT asset at the time of its acquisition on 1 July 2012 (ITAA97 s 108-55).
The demolition of the existing dwelling on the land triggered CGT events C1 (ITAA 97 s 104-20). CGT events C1 happens if a CGT asset owned by a taxpayer is lost or destroyed (see also Taxation Determination TD 1999/79). The events occurred when the dwelling was demolished.
As a CGT event has happened to only part of the asset, you are required to apportion the cost base or reduce cost base between the land and the dwelling using the apportionment rules (ITAA 97s 112-30(2), (3) and (4)).
Because you did not receive any capital proceeds, the effect of these provisions is that no amount is apportioned to the cost base/ reduced cost base of the dwelling (see interpretative decision ATO ID 2002/633). The vacant land retains a cost base of $700,000 with no value attributed to the demolished dwelling.