Private ruling: Main residence exemption
Date of advice: 16 August 2017
Published: November 2017
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the two properties qualify as a single dwelling for the purposes of section 118-115 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Where the dwellings are disposed of as the result of one CGT event and neither property is used to produce assessable income during your ownership, will you be entitled to a full main residence exemption? | A2: Yes. | Q3: Where Property B is rented before you combine the properties, will you only be entitled to a partial main residence exemption? | A3: Yes.

Relevant facts and circumstances: You own an existing semi-detached dwelling, Property A, which is your primary place of residence. You intend to purchase the attached semi-detached dwelling, Property B, for the purpose of combining both properties as a single primary place of residence for your family. It is intended that planning approval be sought immediately following the purchase of Property B and the following capital works be carried out upon receipt of planning approval: a. Removal of the dividing wall between the two properties to create a single integrated sleeping area and a single integrated living area b. Removal of one of the kitchens c. Removal of dividing fence to create a single integrated garden d. Removal of a letterbox with a single letterbox to remain e. Alteration to front entrance with a single main entrance to be created f. Alteration to all services to the properties with one set of services to apply to both properties. It is anticipated that the planning process will take approximately six months, during which time you will receive rent from an existing tenancy at Property B. You are planning on moving into Property B immediately after acquisition and using the property as your main residence while the works are being undertaken. The properties will be used by you, and your family, as a single residence for the remainder of your ownership period.

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

Reasons for decision: Summary: You may disregard a capital gain or loss that happens to a capital gains tax (CGT) asset (dwelling) where you are an individual, the dwelling was your main residence throughout the ownership period, and you did not acquire your interest in it as either a beneficiary or the trustee of a deceased estate (section 118-110 ITAA 1997). Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any gain or loss arising from a CGT event that occurs in relation to that dwelling. The capital gain or loss is calculated using the formula: Capital gain x _________ Non-main residence days________ Total number of days in your ownership period Whether a dwelling is your main residence is a question of fact to be determined in light of the particular circumstances of each case. Except in limited circumstances, you are generally only allowed to treat one dwelling as your main residence at any time. Dwelling The term “dwelling” is defined in section 118-115(1) of the ITAA 1997 as a unit of accommodation that is a building, or contained in a building and which consists wholly or mainly of residential accommodation. Taxation Determination TD 1999/69 considers whether more than one unit of accommodation can constitute a dwelling for the purposes of the main residence exemption. This is possible in circumstances where both units of accommodation are being used together as one place of residence or abode. Whether two or more units of accommodation are used together in this way is a question of fact that depends on the particular circumstances of each case. The factors we will consider in this determination 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 | Detailed Reasoning - Application to your circumstances: In your case, you currently own Property A and are intending to purchase property B for the purpose of combining both properties. The properties: ● will both be used for sleeping, eating and living ● are immediately adjacent and will physically be one building after the removal of the dividing wall ● will be completely interconnected ● could not be sold separately without undertaking significant capital works to re-separate the two properties ● the daily activities will be entirely integrated, with the occupants sharing bathrooms, living areas and a single kitchen within the two properties ● the two properties will transfer to a single set of services. Based on the information provided, it is considered that when the two dwellings are combined they will form a single unit of accommodation. Consequently, provided the properties are disposed of as the result of one CGT event and neither property is used to produce assessable income during your ownership period, you will be entitled to a full main residence exemption on the sale of the properties. However, if Property B is rented after acquisition and before the capital works are completed to combine the properties, you will only be entitled to a partial main residence exemption as the property will still be considered to be a separate dwelling and will not be your main residence during that time.