Private ruling: CGT - main residence - adjacent land
Published: March 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can your subdivided block of land adjacent to your dwelling be considered part of your main residence for CGT purposes? | A1: Yes

Relevant facts and circumstances: The property is your main residence with a land area of XXX square metres. Currently the land is on one title; however you intend to subdivide the land into two separate blocks of equal size. One subdivided block will contain the dwelling and the second block will consist of your current backyard. Approval for the subdivision has been granted. Ownership interests in the subdivided blocks will remain unchanged. You have no intention of selling the subdivided block and will continue to use the land as your backyard. You have no intention of raising a fence or barrier to delineate the boundary of the subdivided blocks.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 section 118-115 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 section 118-165

Reasons for decision: Detailed Reasoning - Subdivision of land: Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title. The acquisition date of the subdivided block will be your original purchase date. However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis. Taxation determination TD 1997/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis. | Detailed Reasoning - Main residence exemption: Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) can disregard a capital gain or capital loss that happens to a dwelling that is a main residence. To get the full exemption from CGT: • the dwelling must have been your home 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 2 hectares or less. Section 118-115 of the ITAA 1997 includes a dwelling to be a unit of accommodation that is a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation. While the main residence exemption contained in Subdivision 118-B of the ITAA 1997 applies to the actual dwelling, section 118-120 of the ITAA 1997 extends the exemption to adjacent land that was used primarily for private or domestic purposes in association with the dwelling up to 2 hectares of land. In your case, you are subdividing your block into two, one containing your main residence and the second (rear) block containing your current backyard. After the subdivision you intend to continue to use the backyard as you do now, for primarily private or domestic purposes. In these circumstances the subdivided rear block would be considered part of your main residence for CGT purposes. | Detailed Reasoning - Change of purpose: If in the future you build a dwelling to be used as a rental property on the subdivided rear block, the purpose of the land will change from that of land used primarily for private or domestic purposes to that of an income earning purpose. This will mean that the subdivided rear block will no longer be considered part of your main residence for CGT purposes. | Detailed Reasoning - Land not sold together with the main residence: In regards to land adjacent to a main residence, Taxation Determination TD 1999/68 states that the main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it (section 118-165 of the ITAA 1997). If you dispose of adjacent land to the same person and at the same time as you dispose of your main residence, the exemption extends to the adjacent land. It does not extend to adjacent land, however, if you dispose of the land separately from the main residence. For example, you dispose of the adjacent land to the same purchaser but at a different time from when you dispose of the main residence, or you dispose of the adjacent land and the main residence to different purchasers even if the disposals happen at the same time.