Private ruling: Capital gains tax main residence exemption
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is your proportion of the main residence exemption restricted to your proportional ownership interest in the property? | Yes.

Relevant facts and circumstances: After 1985, individual A (A) and individual B (B) purchased a property (property X). Property X did not have an existing residence and A and B had a residence constructed for them to live in. A has a sibling (C). A relative of A and C subsequently purchased a separate property (property Y) adjacent to property X. Properties in this area had a minimum size requirement. The relative of A and C subsequently built a residence on property Y. C resided in the residence on property Y with their relative. The relative of A and C subsequently passed away. In terms of the will of the relative of A and C, property Y was to be inherited by A and C, but with the proviso that C had the sole right of occupancy of the house, and also to have an interest in the property. It was subsequently decided by A and C that the bulk of the inherited property Y would be sold, but in a manner that would enable C to occupy the residence and continue to have a recognised interest in the property, as allowed for in the will. In order to meet the minimum land size requirement, it was decided to revise the boundaries of the two properties so that the part of property Y that contained the residence would be added to property X and part of property X would be excised and added to property Y. The revision of the boundaries was effected and property Y was sold by A and C. The remaining property X, an amalgam of most of the original property and the small portion of land containing the residence excised from property Y was registered in the names of A and B and C, who each held an equal one-third share in the property. The only reason for the revision of the boundaries was because of the minimum size requirement of the land. Property X was sold some years later. Both residences on property X had been lived in as main residences since construction, by A and B in the one instance and C in the other.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-150

Reasons for decision: Summary: Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an individual can disregard a capital gain or capital loss made from the disposal of a dwelling, or their ownership interest in it, if the dwelling was the main residence of the individual. To obtain the full main residence exemption: • the dwelling must have been the home of the individual for the whole period of ownership; • the dwelling must not have been used to produce assessable income; and • any land on which the dwelling is situated must be no greater than two hectares in size. Specifically, subsection 118-120 provides that the exemption will apply to the two hectares of land adjacent to the dwelling as long as the land was used primarily for private or domestic purposes in association with the dwelling as if it were a dwelling. Where an individual builds a dwelling on land they own, they may be able to choose to treat the dwelling as their main residence from the time they acquired their ownership interest (section 118-150 of the ITAA 1997). The choice can only be made if the dwelling constructed becomes the main residence of the individual as soon as practicable after the work is finished and it continues to be their main residence for at least three months. There is also a time limit during which the choice can operate. This is the shorter of four years before the dwelling becomes the main residence of the individual, or the period from when they acquired the property and ending when the dwelling became their main residence. Where there is more than one owner of a dwelling, any capital gain, capital loss or main residence exemption calculated on disposal of the dwelling needs to be apportioned in line with the percentage of the ownership interest. In this case, A and B purchased property X, which was more than two hectares in size. They constructed a dwelling in which they resided until the property was sold some years later. A and C inherited the adjacent property Y which contained the residence of C. It was subsequently decided to sell the bulk of property Y while retaining the dwelling of C. The boundaries of property X were revised with a portion of land being excised to be added to property Y, and a portion of land from property Y, containing the dwelling of C, being added to property X. Further, the title to property X was registered in the names of A, B and C, who each held an equal one-third share in the property. Consequently, both A and B disposed of part of their respective ownership interests in property X to C at this time. Property X containing both dwellings was sold some years later. You have asserted that the main residence exemption should be available in full to A and B for their residence and C for their residence ignoring the respective ownership interests. In some circumstances, more than one unit of accommodation on a property may constitute a single 'dwelling' as long as the units of accommodation are used together as one place of residence by the relevant parties. 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? states that factors relevant in considering whether units of accommodation are used together as one place of residence include: • whether the occupants sleep, eat and live in them; • the distance between and the proximity of the units of accommodation; • whether the units are connected; • whether the units are capable of being sold separately; • the extent to which the daily activities of the occupants in the units are integrated; • how the units are shared by the occupants; and • how costs of the units are shared by the occupants. However, in this case, it is evident that the two dwellings on the property cannot be considered to be the one place of residence as A and B lived exclusively in one residence and C lived exclusively in the other residence. Based on the information supplied, each co-owner of property X is entitled to a main residence exemption based on their individual ownership interest in the property. There are no provisions in the legislation that allow the main residence exemption to be applied in any other way than on the proportional ownership interest of each individual. The main residence exemption needs to be calculated for each of A and B taking into account the maximum two hectare land size limit, any income producing activities carried out on the property, the value of the dwelling they resided in, the value of property X as a whole and the proportional ownership interest A and B each had in the property.