Private ruling: CGT - main residence exemption
Date of advice: 11 February 2026
Published: 30 March 2026
Ruling period: For the income year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you able to partition the main residence exemption between the house area and land area separately on the disposal of the Property, where a granny flat was used for income earning purposes? | A1: No. | Q2: Should you request an amendmentto change the over claimed amount of interest and rates expenses on your tax returns? | A2: Yes. | Q3: Are you entitled to claim a partial main residence exemption on the disposal of the Property, even though you used part of the home (being the granny flat) to produce assessable income during the ownership period? | A3: Yes.

Relevant facts and circumstances: In MM YYYY you (X) and your spouse at the time (X) purchased vacant land situated at X (the Property) for $X. The total land area of the Property was X square metres or X hectares. The buildings constructed on the Property consisted of a house and a granny flat with the total construction costs being $X. The construction was completed on DDMMYYYY and you moved into the home on the Property on DDMMYYYY and lived in it as your main residence. From MM YYYY you used the granny flat building to produce rental income under the name 'X' using AirBnB and Booking.com platforms. The floor area of the house was X square metres. The floor area of the granny flat building was X square metres.. You reported both income and expenses relating to the granny flat rental property in your relevant tax returns. You legally separated from X under the section 81 of the Family Law Act 1975 financial court order dated DDMMYYYY. The granny flat ceased being used to produce rental income on DDMMYYYY. The Property was disposed of in a contract dated DDMMYYYY with settlement occurring on DDMMYYYY for $X. There was no written granny flat arrangement relevant to the Property and its use.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 170 | Income Tax Assessment Act 1936 section 175A | Taxation Administration Act 1953 section 14ZX | Income Tax Assessment Act 1997 section 108-55 | Income Tax Assessment Act 1997 Subdivision 115-A | Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 subsection 118-110(1) | Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 subsection 118-120(3) | Income Tax Assessment Act 1997 section 118-190

Reasons for decision: Summary: Subdivision 118-B of the ITAA 1997 disregards a capital gain or capital loss that happens to a dwelling that is a main residence. A 'dwelling' for CGT purposes includes a building that is a unit of accommodation and the land immediately underneath that building (section 118-115 of the ITAA 1997). Subsection 118-120(3) of the ITAA 1997 extends the area of adjacent land that is used primarily for private or domestic purposes in association with the dwelling up to a maximum of 2 hectares, less the area of the land immediately under the dwelling. The general position at common law is that whatever is affixed to the land is part of the land. So, for most purposes, a building constructed on land would be treated as part of the land. In the CGT context, a building constructed on land generally forms part of the CGT asset comprised in the land. Construction and other costs are factored into the cost base or reduced cost base of the land. Section 108-55 of the ITAA 1997 explains that a building or structure on land that you acquired on or after 20 September 1985 (post-CGT) is taken to be a separate CGT asset from the land if one of the following balancing adjustment provisions applies to the building or structure (whether or not there is a balancing adjustment): • Subdivision 40-D - capital allowances and • Section 355-315or section 355-525of the ITAA 1997 - research and development. Taxation Determination TD 1999/69 Income tax: capital gains: can the term 'dwelling' as defined in section 118-115 of the Income Tax Assessment Act 1997 include more than one unit of accommodation? The main residence exemption applies to a dwelling, or a taxpayer's ownership interest in it, that qualifies as a "main residence" under subsection 118-110(1). Section 118-115 provides the definition of dwelling and this includes: (a) a unit of accommodation that is a building or is contained in a building and which consists wholly or mainly of residential accommodation; (b) a unit of accommodation that is a caravan, houseboat or other mobile home; and (c) any land immediately under the unit of accommodation. The main residence exemption extends to cover land adjacent to the dwelling where the CGT event happens to both the adjacent land and the dwelling. To qualify for exemption under section 118-120, the adjacent land must satisfy the following conditions: (a) it must satisfy the definition of adjacent land (and adjacent dwelling) (b) it must be used primarily for private or domestic purposes in association with the dwelling (c) it must not be disposed of separately from the dwelling, i.e. the same CGT event must affect the land and the dwelling (d) the maximum area of the land (including the land under the dwelling) must not exceed 2 hectares. | Detailed Reasoning - Meaning of adjacent land: Adjacent land does not have to be immediately adjacent to the dwelling in order to qualify for the exemption. In this regard, Taxation Determination TD 1999/68 Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling? states that the land need only be close or near to the dwelling to be "adjacent" and it does not have to be "contiguous" with the land on which the dwelling is situated. However, it must satisfy the requirement of being used primarily for private or domestic purposes in association with the dwelling. Relevant case law on the meaning of "adjacent" land includes the decision of the Privy Council in Mayor of Wellington v Mayor of Lower Hutt [1904] AC 773 where it was held that the word "adjacent ... is not confined to places adjoining, and it includes places close to or near." (at 775-776). Likewise, in Penrith Rugby League Club Ltd v Commissioner of Land Tax (NSW) [1983] 2 NSWLR 616; (1983) 15 ATR 1, the court held that land separated by a public road formed one site because of a unity in the use of the land. | Detailed Reasoning - Meaning of "adjacent structures": The main residence exemption also applies to the adjacent structures of a flat or home unit. Accordingly, where a dwelling is a flat or home unit, the main residence exemption applies to a garage, storeroom or "other structure" associated with a flat or home unit. As with the extension of the exemption to adjacent land, it is important to note that the exemption for such structures applies to the extent that the structures are used primarily for domestic or private purposes. In Taxation Determination TD 2000/15 Income tax and capital gains tax: what is meant by the phrase 'to the extent that' in subsection 118-120(1) of the Income Tax Assessment Act 1997 where it refers to 'land that is adjacent to a dwelling... to the extent that you used the land primarily for private or domestic purposes in association with the dwelling as if it were a dwelling? the ATO stated that this would be a question of fact and degree depending on the circumstances. Examples of "other structures" (in addition to garages and storerooms) that could qualify for exemption include a separate laundry or a workshop. Under the rules of statutory interpretation, the phrase "other structures" should be considered in the context of structures similar to garages, storerooms etc. Note that if an adjacent structure is affected by a CGT event other than the one that affects the dwelling (in the general case) or other than by a compulsory acquisition, the exemption will not be available in respect of that CGT event In your case the house and granny flat buildings you built on your Property are not taken to be separate CGT assets from the land as none of the balancing adjustment provisions apply to the buildings. To meet the definition of a dwelling, you must include the area of adjacent land associated to the building/s on the land up to a maximum of 2 hectares, less the land directly underneath the buildings. You therefore cannot partition the calculations between the house floor area and land area and work out the building gain and the land gain separately. Your entire property is one CGT asset for the purposes of applying the main residence exemption and working out the net capital gain or loss. You need to exclude the X square metres which was used to produce rental income from the total land area of X square metres when calculating the taxable percentage of the capital gain made on the entire Property on the disposal. | Detailed Reasoning - Question 2: When you use a property to produce assessable income and hold it for another use (for example, part of a property is rented out), losses and outgoings related to the property will need to be apportioned on a 'fair and reasonable' basis to work out the deduction that can be claimed under the general deduction provision section 8-1 of the ITAA 1997. The Commissioner can amend the income tax return, for an individual, for a year of income within 2 years after the day on which we give the notice of the assessment to the individual as per section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) . If you are out of time to amend your assessment, you can lodge an objection to the Commissioner where the period of review has already expired under section 175A of the ITAA 1936. Under section 14ZX of the Taxation Administration Act 1953 , the Commissioner is required to consider applications for an extension of time, and provide you with written notice of the decision, on whether to accept a late amendment of a return. In your case X square metres or X% of the total land area of X square metres was used to produce rental income. You can therefore claim this percentage of your expenses such as interest and rates, so you should amend your prior income tax returns where the incorrect percentage has been over claimed. | Detailed Reasoning - Question 3: Section 118-190 of the ITAA 1997 allows a partial exemption for a CGT event in relation to a dwelling or your ownership interest in it if: (a) apart from this section, because the dwelling was your main residence or someone else's during a period: (i) you would not make a capital gain or capital loss from the event; or (ii) you would make a lesser capital gain or loss than if this Subdivision had not applied; and (b) the dwelling was used for the purpose of producing assessable income during all or a part of that period; and (c) if you had incurred interest on money borrowed to acquire the dwelling, or your ownership interest in it, you could have deducted some or all of that interest. When you sell a property you've owned for at least 12 months you can use the CGT discount (50% for individuals) as an Australin resident to reduce the capital gain pursuant to Subdivision 115-A of the ITAA 1997. In your case the floor area used by tenants was X square metres out of the total land area of the Property being X square metres. This was from MMYYYY until the disposal of the Property. You are eligible for the 50% CGT discount when calculating your net capital gain.