Scott Tracy advises you that on 11 March 2003, he bought a three-bedroom house and land in Clayfield at a cost of $450,000. Scott immediately moved into the house and occupied it as his main residence and has lived there ever since. The land is 1.6 hectares in size. At the time of purchase, the land is independently valued at $300,000 and the house at $150,000.
However, Scott informs you that he eventually grew tired of maintaining such a large block and on 19 August 2010 he subdivided the property into two equal blocks:
- Block A (the front block which contained the house); and
- Block B (the back block consisting of vacant land).
The Lands Titles Office registers two separate blocks in Scott’s name. On 19 August 2010, Scott incurred $12,000 in survey, legal and subdivision application fees and $2,000 in connecting the water and drainage to the Block B (ie. the back block).
This is the first (and only) time that Scott has subdivided land in his life. Scott continued to reside in the house which was located on Block A (ie. the front block).
On 17 July 2012, Scott entered into a contract to sell the back block (ie. Block B) for $275,000. He incurred legal expenses of $3,000 on sale. Settlement occurred on 21 August 2012.
On 3 May 2013, Scott sold the front block (ie. Block A) consisting of the land and house for $425,000 under a contract of sale. He incurred legal expenses of $4,200 on sale. Settlement occurred on 4 June 2013. He has lived in this house since he bought it on 11 March 2003.
Required:
Scott specifically seeks your advice on the following matters:
(i) whether the subdivision of the land in August 2010 constitutes a CGT event?;
(ii) whether the sale of the vacant land (ie. Block B) in July 2012 will be subject to capital gains tax or income tax (or neither)? If so, Scott asks that calculate any tax that may be payable; and
(iii) whether the sale of the front block, consisting of the house and land (ie. Block A) in May 2013 will be subject to capital gains tax or income tax (or neither)? If so, Scott asks that calculate any capital gain that may be applicable.
You can assume that Scott wants to minimise his overall tax liability wherever legally possible. Furthermore, Scott advises you that he has no other capital gains or capital losses in the current year and no carry-forward capital losses arising from previous income years.
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