Private ruling: Capital gains tax – main residence exemption - acreage & apportionment
Date of advice: 29 November 2018
Published: March 2019
Ruling period: For the financial year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a full main residence exemption on the sale of the property? | A1: No | Q2: Can you use the market valuation/appraisal for the purpose of apportioning the value of the land between the part that qualifies for the main residence exemption and the land in excess of the two hectares? | A2: No | Q3: Can you apply any other exemption to Capital Gains Tax on the disposal of the property? | A3: No

Relevant facts and circumstances: You and your spouse jointly purchased vacant land after 20 September 1985. The land area of the vacant property was greater than two hectares. A dwelling was built on the vacant land one year later. Other structures were also built on the property. Cost details for construction of the dwelling and buildings on the property have been destroyed. You and your spouse resided in the dwelling located on the property. Your spouse passed away and you continued to live in the dwelling on the property. The dwelling was not used to produce assessable income. The dwelling and property were sold. The whole property was independently valued. There was a separate valuation completed for the dwelling including two hectares of land. The dwelling and property sold over one year after being placed on the market for sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-120

Reasons for decision: Summary: Main residence exemption and land area greater than two hectares You pay tax on certain capital gains you make. You make a capital gain or a capital loss when a 'CGT event' happens. The most common CGT event A1 happens when you dispose of the asset to another party, for example the disposal of a property. A capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if you are an individual and: ● the dwelling was your main residence throughout your ownership period; and ● the property was not used to produce assessable income. The main residence exemption extends to a maximum of two hectares of land adjacent to the dwelling, including the area of the land on which the dwelling is built (exempt land). The land does not have to be contiguous to, that is, touching or in contact with, the land on which a dwelling is situated to be 'adjacent' to the dwelling (Taxation Determination TD 1999/68). Adjacent land is only included in the two hectare exemption if the land is used primarily for private or domestic use and not to earn assessable income, such as primary production. Any excess land (non-exempt land) over the two hectares will be subject to the CGT provisions as it is not covered by the main residence exemption. Where a taxpayer has land that exceeds two hectares and wishes to select the main residence exemption, Taxation Determination TD 1999/67 outlines how to calculate any capital gain or capital loss on land in excess of the two hectares for the main residence exemption. TD 1999/67 states at paragraphs 3 to 5: 3. If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land. 4. If your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis. 5. The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances. It is clear from paragraph 3 of TD 1999/67 that where the value of the selected area of land for the main residence exemption is greater or less than the remainder of the land and both areas can be valued separately, the capital gain or capital loss is calculated by apportioning the capital proceeds and the cost base, or reduced cost base, on the basis of valuation. Otherwise, the percentage used in relation to the apportioning of the capital proceeds and cost base/reduced cost base can be determined on an area basis. In either case, the amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances. Whichever method is used, the whole of the property must be valued so that the apportionment percentage can be determined and applied in relation to the exempt and non-exempt areas of the property. Capital Proceeds The capital proceeds from a CGT event (subsection 116-20(1) of the ITAA 1997) is the total of: (a) the money you (the taxpayer) have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). Records Record keeping requirements under the CGT provisions are detailed in the legislation (Division 121 of the ITAA 1997). It requires that you must keep records of every act, transaction, event or circumstance that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event. If records are lost or have not been maintained for the purpose of calculating your CGT cost base you should first make an attempt to obtain the relevant documentation by approaching the relevant parties and obtaining copies. These may be obtained from builders, contractors, accountants, insurance bodies, solicitors, real estate agents and/or government authorities. In the event that the necessary documentation cannot be obtained, you must reconstruct them or have someone else reconstruct them (subsection 121-20(5) of the ITAA 1997). For tax purposes, appropriately qualified people to undertake a valuation include (Taxation Ruling TR 97/25): Depending on the situation, a market valuation may be undertaken by a: ● a quantity surveyor, who has expertise in the relevant type of construction; ● a clerk of works, such as a project organiser for major building projects; ● a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or ● a builder who is experienced in estimating construction costs of similar building projects. Application to your situation You and your spouse jointly purchased vacant land with an area size greater than two hectares. Other structures were constructed on the property after purchasing the vacant land. Since purchasing the property your spouse has passed away. The property has been sold with settlement occurring during the financial year ended 30 June 2018. You may apply the main residence exemption to a maximum of two hectares of the property on which the dwelling is located. The two hectares of land does not need to be connected to the land under the dwelling. It can be chosen from anywhere on your property as long as it is used for private or domestic purposes in association with the dwelling. The remaining land, the non-exempt land, is subject to CGT as it will not be covered by the main residence exemption. There is no other exemption which can be applied to the property or the land exceeding the two hectares. The Commissioner has no discretion to exempt the remaining land and as such it will be subject to the capital gains tax provisions. Costs were incurred in building the other structures on the land. The records in relation to these costs have been lost or destroyed. These records will need to be reconstructed by an appropriately qualified person for the purpose of calculating the cost base for CGT purposes. An independent valuation was obtained in relation to the whole property and a separate valuation was obtained for the two hectares of land on which the dwelling is located. The dwelling and property sold and a sum of money was received which is the capital proceeds. In your case the selected area of land for the exemption has been separately valued. You must calculate the capital gain or capital loss on the remainder of the land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the capital proceeds.