Private ruling: Capital Gains Main Residence Exemption
Date of advice: 26 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016

Ruling: Q1: Will the garage be considered to be an adjacent structure and treated as if it were a part of the dwelling for the purposes of the main residence exemption if it was primarily used for domestic and private purposes? | A1: Yes | Q2: Does renting the garage for around 10% of the ownership period at below market rates meet the criteria for primarily private use? | A2: Yes | Q3: Is it necessary to apply a partial CGT main residence exemption to the sale of the unit where the garage has been used to earn income during the ownership period? | A3: No

Relevant facts and circumstances: The Taxpayer purchased the unit in sometime after 1985, and has lived in it as their main residence since that date. The unit was sold sometime later, and the taxpayer remained in residence until the time of the sale. The garage was sold as part of the sale of the unit. The garage is not physically connected to the unit. The taxpayer rented the garage of the unit to a former colleague for a number of years in the middle of the ownership period. The taxpayer originally offered the free use of the garage, but the tenant insisted on some payment, so a well below market rate per week was settled on. The taxpayer declared the rent received as income and claimed no deductions against it. Before and after the garage was rented, and to a limited extent while it was rented, the taxpayer used it for storage of personal property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 section 118-190 | Income Tax Assessment Act 1997 section 118-192

Reasons for decision: Summary: A garage, shed or other building that is not attached to a dwelling is an adjacent structure and for CGT purposes is considered to be part of the associated dwelling when sold at the same time, if it has been used primarily for private or domestic purposes. | Detailed Reasoning - Detailed reasoning: Section 118-120(5) of the Income Tax Assessment Act 1997 states that an adjacent structure to a flat or home unit will be treated as if it were part of the dwelling, provided the same CGT event happens to it. Section 118-120(6) defines a garage as an adjacent structure, to the extent that it was primarily used for private or domestic purposes. Dwelling is defined in section 118-115 ITAA 1997 as a unit of accommodation that is contained in a building and consists wholly or mainly of residential accommodation. Dwelling does not include adjacent land except as provided for in section 118-120. In this case the garage is not attached to the unit, and was sold with the unit. It will be an adjacent structure if the use has been primarily private or domestic. | Summary: The garage has been used primarily for private purposes. A relatively insignificant use of an adjacent structure for profit making purposes will not preclude it from having been used primarily for private or domestic purposes. | Detailed Reasoning - Detailed reasoning: If the usage is primarily private or domestic, the garage will be eligible to be included in the main residence exemption when the unit is sold. The minor usage for non-private and domestic purposes may be disregarded. There will be no need to apportion the gain. Tax Determination 2000/15 states that whether or not land is used primarily for private or domestic use for the entire ownership period is a test of fact and degree. Where the land has not been primarily used for private or domestic purposes for some or all of the ownership period some apportionment may be required when calculating a capital gain or a capital loss. Further, 'primarily for private or domestic purposes' does not mean exclusively for private or domestic purposes, but allows a small amount of non-private, non-domestic use. Equally, 'primarily' does not imply slightly more than 50% use. Primarily takes its ordinary meaning, that is chiefly or principally. The garage was used for approximately 10% of the period of ownership for partly non-private or domestic purposes. During this period, the garage was still used partly for the private purpose of storing the owner's possessions. That the owner originally offered the garage free of charge, and later settled on rental rates considerably below commercial rates, and that the rental was provided to a former associate, lends weight to the arrangement being partially private in nature, even during the time it was let. Weighted over time and usage, the garage has been used primarily for private and domestic purposes. Non-private use of the garage has been insignificant. No apportionment needs to be applied to calculating whether the gain is taxable or not. | Summary: As it has been established that the garage is an adjacent structure that has been used primarily for private and domestic purposes, it is not necessary for you to consider whether section 118-190 or section 118-192 of the ITAA 1997 apply. The matter has already been considered. | Detailed Reasoning - Detailed reasoning: Section 119-120 of the ITAA 1997 provides for apportioning the eligibility for an exemption where the adjacent structure has been used for earning income. It can be taken that in order for an adjacent structure to qualify as part of the residence without apportionment, use for non-private or domestic purposes had already been considered and found to be minor, and consequently may be disregarded. If it were intended that the garage should then potentially be subject to the partial exemption rules in section 118-190, there would be no need to treat it separately under section 118-120. You are entitled to apply the full main residence CGT exemption to your gain on the sale.