Private ruling: Capital gains tax - main residence exemption - two dwellings
Date of advice: 28 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a full main residence exemption for Property B? | A1: No | Q2: Are you entitled to a partial main residence exemption for Property B? | A2: Yes

Relevant facts and circumstances: You purchased a property (Property A) in mid 20XX, and you have occupied this property as your principal place of residence for the full period of ownership. In late 20XX you purchased the adjoining property (Property B). At the time of the purchase it was your intention to undertake substantial renovations and to use both properties as your sole principal place of residence. Immediately following its purchase, you rented Property B out to tenants between early 20XX and early 20XX, for a period of 12 months. At the time of purchasing Property B, it was also your intention to open up the wall between Property A and Property B so the two properties could be used together as your sole principal place of residence. Regarding the proposed renovations to Property B, full detailed architectural drawings were prepared along with structural engineering drawings. The building permit for the renovations to Property B was issued in mid 20XX, a few months after the tenants moved out, and this is when the renovations commenced to enable both properties to be used by you as your main residence. The description of works undertaken, as noted by the Building Surveyor was “Alterations to existing apartment and creation of internal openings to adjoining Property A”. The certificate of final inspection was issued by the building surveyor in early 20XX, and you commenced using Property B as your main residence from this date (as the required renovations were completed). Property A and Property B are not listed on separate titles. Property A and Property B were both sold during the 2017-18 financial year. The land on which Property A and Property B is situated is less than two hectares in size. No one else has lived in Property B apart from the tenants who rented the property, and yourself.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | 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 118-135

Reasons for decision: Summary: You will not be entitled to a full main residence exemption as you did not occupy Property B when it was first practicable to do so. However you will be entitled to a partial main residence exemption from the time you commenced building works on Property B in preparation for combining Property A and Property B together for use as your sole principal place of residence. | Detailed Reasoning - Detailed reasoning: Under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) you can generally disregard a capital gain or capital loss you make from the disposal of a dwelling that qualifies as your main residence when the dwelling was your main residence for the whole period you owned it, and your interest in the dwelling did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. Also, under section 118-120 of the ITAA 1997, to get the full exemption from CGT any land on which the dwelling is situated must be two hectares or less, which you have confirmed is the case regarding the property. For the main residence exemption to apply to your whole ownership period, you must move into the dwelling as soon as practicable after you purchase the dwelling (section 118-135 of the ITAA 1997). Also, section 118-135 of the ITAA 1997 extends the main residence exemption to take account of the time needed to move into a dwelling. It includes the period from when you acquired the main residence (generally the date of settlement) to when it was first practicable to move into the dwelling after it was acquired. This is to take account of situations where, for example, there is a delay in moving because of illness or other similar cause beyond your control. Generally, access to the exemption is based on the common law definition of main residence. This definition may be extended or limited by other provisions in Subdivision 118-B of the ITAA 1997. A dwelling includes a unit of accommodation that is a building or is contained in a building, and consists wholly or mainly of residential accommodation (section 118-115 of the ITAA 1997). | Detailed Reasoning - Can the term ‘dwelling’ as defined in section 118-115 of the ITAA 1997 include more than one unit of accommodation?: Whether two or more units of accommodation are used together as one place of residence or abode for the purposes of the definition of dwelling is a question of fact that depends on the particular circumstances of each case. Taxation Determination TD 1999/69 outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. These include: (a) whether the occupants sleep, eat and live in them; (b) the distance between and the proximity of the units of accommodation; (c) whether the units are connected; (d) whether the units are capable of being sold separately; (e) the extent to which the daily activities of the occupants in the units are integrated; (f) how the units are shared by the occupants; and (g) how costs of the units are shared by the occupants. | Detailed Reasoning - Application to your circumstances: After purchasing Property B in late 20XX, you subsequently and immediately rented the property out for a period of 12 months from early 20XX to early 20XX. Following obtaining the relevant building permit in mid 20XX you commenced renovations to combine Property A and Property B together so you could use both units as your main residence. As such, and when weighing up the factors relevant in considering whether units of accommodation are used together as one place of residence or abode, which are outlined in TD 1999/69, you did not treat Property A and Property B as one dwelling prior to the commencement of the renovations. Despite your intentions of using Property B as your principal place of residence at the time it was purchased, you only commenced renovations on Property B to prepare it for being combined with Property A as your sole principle place of residence following the period it was rented out, in mid 20XX, and you did not move into Property B until those renovations were completed in early 20XX. Also, you did not move into the property as soon practicable after its acquisition. You commenced the required renovations on Property B after having owned the property for over one and a half years, following a 12 month period of renting the property to others. This is not a circumstance that is a delay in moving in because of illness or other similar cause beyond your control in accordance with section 118-135 of the ITAA 1997, but was rather a choice that you made (renting the property to others prior to undertaking the renovations) that caused the delay in you eventually moving in Property B. As such you will not be entitled to a full main residence exemption. However, based on your circumstances, we accept that in line with TD 1999/69, you have treated both Property A and Property B as the one dwelling from the time you commenced the required renovations to combine the two properties as one for your use as your main residence in mid 20XX, as this was your sole purpose from that point onwards, and the property was also not used for any other purpose from that point in time. This will entitle you to a partial main residence exemption for Property B. | Detailed Reasoning - Partial main residence exemption: Section 118-185 of the ITAA 1997 allows a partial main residence exemption where the dwelling is the individual’s main residence for only part of the ownership period. If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption (section 118-185 of the ITAA 1997). You calculate your capital gain using the following formula: Capital gain x Non-main residence days Total number of days in your ownership period In your case, your non-main residence days will be the number of days in your ownership period when the property was not your main residence. The ownership period commences from the date that you had an ownership interest in the property. That is from the time that you purchased the property until settlement upon disposal of the property.