According to the ATO, any intangible capital improvements made to a pre-CGT asset may be treated as a separate CGT asset.
Taxation Determination TD 2017/1 sets out the ATO’s view that the separate Capital Gains Tax (CGT) assets regime extends to intangible capital improvements made to a pre-CGT asset. This is particularly relevant for entities holding land purchased before 19 September 1985. In the ATO’s view, any intangible capital improvement made to that asset, including council approvals to rezone and subdivide, may be separate assets from the land for CGT purposes.
Subsections 108-70(2) and (3) of the Income Tax Assessment Act 1997 deem a capital improvement to a CGT asset to be a separate CGT asset in particular circumstances. More specifically:
- Any unrelated capital improvements to a pre-CGT asset will be treated as a separate CGT asset provided that the cost base of the improvement when a CGT event happens:
- exceeds 5% of the capital proceeds from the event; and
- exceeds the improvement threshold for the income year in which the event occurs (for example, the improvement threshold was $143,392 for the 2015-16 income year);
- Similarly, the rule applies to any related improvements to pre-CGT assets, except that the improvements are aggregated for the purposes of applying the above tests. (collectively the ‘separate CGT asset thresholds’)
Prior to TD 2017/1, the ATO had not provided any guidance on their view as to whether section 108-70 was restricted to only tangible improvements such as the construction of a building. However, the ATO’s view is now clear that section 108-70 is not confined to tangible improvements. Where an intangible capital improvement is made to a pre-CGT asset, that improvement itself may be treated as a separate CGT asset. The example in TD 2017/1 provides that:
A farmer, holding pre-CGT land, obtains council approval to rezone and subdivide the land. Those improvements may be separate CGT assets from the land.
TD 2017/1 may have significant impact on entities that have pre-CGT land holdings they intend to develop and sell now. If the ATO view is correct, the real question in this scenario will be whether the cost base of the ‘council approvals’ exceeds the separate CGT asset thresholds at the time of sale. If the separate CGT asset thresholds are exceeded the next issue will be apportioning the sales proceeds from the land between the original land parcel and the council approvals.
Whilst TD 2017/1 may be short, the explanation is provided in less than half a page of text, the implications of it may be far reaching.