Private ruling: Capital gains tax - main residence exemption - land exceeding two hectares - apportionment
Date of advice: 18 March 2016
Published: May 2016
Ruling period: 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Can you use the 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? | A1: No.

Relevant facts and circumstances: You and your spouse jointly purchased (the property) after 20 September 1985. The land area of the property is around 20 hectares. You and your spouse resided in the house located on the property. You and your spouse sold the property, with settlement occurring during the 20XX-YY income year. At the time the property was sold, a house, shedding and stockyards were located on the property. You and your spouse obtained an appraisal from a real estate agent on the value of two hectares of land in the property, the house, shedding and stockyards. The estimated valuation was provided on the assumption that subdivision of the property was available.

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: Summary Whichever method is used by a taxpayer, 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. Detailed reasoning | Detailed Reasoning - Main residence exemption and land area greater than two hectares: Capital gains tax (CGT) is the tax you pay 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). Taxation Determination TD 1999/68 indicates that 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. 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.' These are examples, however 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. The Commissioner has ruled in other cases that a taxpayer may calculate their capital gain using whichever of these methods of apportionment is reasonable in their 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. Note: Where part of the chosen two hectares is used to produce income, you may need to further reduce the exempt amount. It is also important to note Taxation Determination TD 92/148 which explains that, generally, when two people jointly own a property, they both have a 50% interest in the whole property- that is, they do not own half of the property in terms of area, but they own half of the whole land. Application to your situation You and your spouse jointly purchased a property with an area size of around 20 hectares. You and your spouse resided in the dwelling located on the property. The property has been sold with settlement occurring during the period covered by this private ruling. You and your spouse will apply the main residence to two hectares of the property on which the dwelling, shed and stockyards are located, the exempt land. The remaining land, the non-exempt land, is subject to CGT as it will not be covered by the main residence exemption. You have obtained an appraisal from First National Real Estate Giles Jones in relation to the value of two hectares of land on which the dwelling, shed and stockyards are located. The two hectares were valued at $730,000 on the assumption that subdivision was available in relation to the property. However, the value of the two hectares provided in the appraisal is not acceptable to the Commissioner for the following reasons: • it was provided on the basis that the property could be subdivided. Your property was sold with subdivision of the property not being available in relation to the property. Therefore, the appraisal is not viewed as a true value of the two hectares of land relevant for the main residence exemption; also • the appraisal represents a value of exempt part of the property and not the whole property. For it to be acceptable, it must be a valuation of the whole property, being the two hectares and the excess portion of the property over the two hectares so that a percentage on which the apportionment should be based can be determined. As outlined above, the cost base of the land must be apportioned between the two hectares for the main residence exemption and the land in excess of the two hectares on a reasonable basis with the percentage used for the apportionment being determined on the value of the whole property. You can use whichever method is most appropriate for your circumstances so that you can determine the percentage on which use when apportioning your share of the capital proceeds and the cost base or reduced cost base of your ownership interest in the property. Note: Where allowable costs incurred are wholly associated with the land that is subject to capital gains, all of those costs are included in its cost base. However, where the costs incurred are associated with the entire property, that is, the exempt portion as well as the land in excess of two hectares, the costs need to be apportioned on the basis of the valuation. The purchase price of the property must also be apportioned between the exempt and non-exempt portions.