Private ruling: CGT-Main residence exemption
Date of advice: 6 October 2017
Published: March 2018
Ruling period: Year ending 30 June 20XZ
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: Will the lump sum payment you receive for surrendering your right to occupy the dwelling be subject to capital gain tax? | A1: Yes | Q2: Will you be entitled to disregard any capital gain or loss as a result of the receipt of the lump sum payment made to you to surrender your right to occupy? | A2: Yes

Relevant facts and circumstances: You entered into an agreement with your former partner’s parents and partner in 20XX (the agreement). The agreement provided you and your partner with a right to reside in residence A (the dwelling). As part of the agreement, you would contribute a specified amount towards the renovation of the dwelling. In return for your financial contribution you were allocated an interest in the dwelling. Your former partner contributed money and was allocated an interest in the dwelling. To reduce the loan taken out by your partner’s parents to renovate the dwelling and granny flat, the renovations were scaled back and your financial contribution was adjusted. The dwelling and granny flat has remained in the name of your partner’s parent. The renovations were completed in later 20XX and you, your partner and child moved into the dwelling. Your partner’s parents moved into a granny flat. You resided in the dwelling throughout your ownership period, leaving as a result of the relationship breakdown in 20YY. You former partner and your partner’s parents deny the validity of the agreement entered into in 20XX and characterise your financial contributions to the renovations as a lease amount for your right to occupy the dwelling. You, the dwelling owner and former partner are in legal dispute about whether you have an equitable or legal interest in the dwelling. You have paid all rates and utility costs associated with the dwelling and granny flat since resided in the dwelling. You are in the process of entering into a deed of settlement and release with the owner of the dwelling and your former partner. The deed of release provides that you will relinquish any right, title or interest in the dwelling upon receiving a payment from the dwelling owner.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section118-130

Reasons for decision: Summary: The consideration received for surrendering your right to occupy the dwelling is subject to capital gain tax (CGT). | Detailed Reasoning - Detailed reasoning: Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or a capital loss as a result of a CGT event happening You will make a capital gain if the capital proceeds you receive from the surrender of your right to occupy are more than the asset’s cost base. You make a capital loss if those capital proceeds are less than the asset’s reduced cost base. The cost base includes the initial cost to purchase the right to occupy as well as other costs to protect your right to occupy, including legal costs. In your circumstances, you entered into a contractual agreement with the property owner after 20 September 1985. CGT applies to events that occur to ownership interest acquired after 20 September 1985. Your capital proceeds from the surrender of your right to occupy will be the payment you received as agreed in the consent orders and deed of agreement and release. You make a capital gain if the capital proceeds exceed the cost base of acquiring and protecting the right to occupy you have in the dwelling. | Summary: You will be entitled to disregard the capital gain made upon receipt of the lump sum payment as a result of surrendering your right to occupy, as the property has been your main residence for the entire period of your ownership interest. | Detailed Reasoning - Detailed reasoning: In the case of a flat or home unit, you have an ownership interest if you have: ● a legal or equitable interest in a stratum unit in it; or ● a licence or right to occupy it; or ● a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you a right to occupy it. Generally, if you are an individual and not a company or trust, you can ignore a capital gain or loss made from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT you must: ● have resided in the dwelling for the whole period you owned it ● you must not have used the dwelling to produce assessable income, and ● any land on which the dwelling is situated must be two hectares or less. In your circumstances, you entered into an agreement with the property owner and other parties to the agreement to provide a sum of money to cover the refurbishments to an existing dwelling, which you in return received a right to occupy this dwelling. It is considered that you have an ownership interest because you have a right to occupy the dwelling. The dwelling has been your main residence for your entire ownership period. You are exempt from CGT for the payment received in relation to surrendering your right to occupy the dwelling that is your main residence.