Private ruling: Capital gains tax - main residence exemption
Date of advice: 8 February 2017
Published: July 2017
Ruling period: Income year ending 30 June 20BB | Income year ending 30 June 20CC | Income year ending 30 June 20DD | Income year ending 30 June 20EE; and | Income year ending 30 June 20FF
Date scheme commenced: 1 July 20AA

Ruling: Q1: Will you be eligible to the main residence exemption on the disposal of your ownership interest in one of the houses collectively known as “ House B” under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA1997)? | A1: No.

Relevant facts and circumstances: Your spouse purchased a property (House B) which consisted of adjoining independent houses on a single property title. Renovations to convert House B were started over 12 months after it was purchased so that it could be used as a single residence which included the following activities: ● replacing and/or repairing all services and utilities, such as electrics, plumbing, new heating and cooling, gas, internet and phone; ● installing new flooring, ceilings where necessary and energy compliant windows; ● painting; ● removal of walls; ● installation of new kitchen, bathrooms and toilets; ● installation of new security doors, cameras and alarm system; ● installation of new external doors; and ● paving and installation of drainage in rear courtyards. The renovations were completed after a number of months. Until this time, you and your spouse's main residence had been Property A. You entered into a contact to sell Property A prior to moving into House B. You and your spouse commenced living in House B in the month that the renovations were completed, using the houses as your residence, and expect to use it as your family's main residence for the foreseeable future. Settlement on the sale of Property A occurred in the month after you had moved into House B. You and your spouse will be applying the main residence exemption in relation to the disposal of Property A in your 201X-AA income tax return. You spouse intends transferring a specified percentage of their ownership interest in House B to you. You and your spouse intend undertaking the following: ● subdividing House B into lots, with a house located on each lot; ● undertaking the necessary works to make the houses into stand-alone dwellings; ● disposing of one of the houses that is known as House B; and ● residing in the remaining house/s, which will continue to be your main residence. You and your spouse do not have any intention of undertaking any similar activities in the future. Assumption This ruling decision has been made based on the assumption that the following will occur during the ruling period: ● Property A meets the relevant conditions for section 118-140 of the Income Tax Assessment Act 1997 to apply; ● you and your spouse will apply the main residence exemption in relation to the disposal of Property A in the 201X-AA income year; ● your spouse will transfer a specified percentage of their ownership interest in the houses, which combined make up House B, to you; ● after the transfer, you and your spouse will each have a specified percentage of ownership interest in the houses known as House B; ● you and your spouse will subdivide the lot on which House B is located into lots, with a house located on each lot; ● you and your spouse will complete the necessary works to make the houses standalone dwellings; ● you and your spouse will dispose of one of the houses and the lot on which it is located; ● you and your spouse will not apply the main residence exemption in relation to the house you sell; and ● the remaining house/s will continue to be you and your spouse's main residence/s after the sale of the other house.

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 112-25 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-125 | Income Tax Assessment Act 1997 Section 118-130 | Income Tax Assessment Act 1997 Section 118-140 | Income Tax Assessment Act 1997 Subdivision 115-A | Income Tax Assessment Act 1997 Subdivision 115-B

Reasons for decision: Summary: Summary The capital gains tax (CGT) provisions consider what you are selling at the time the CGT event occurs. As you are selling a house that is not your main residence, you are not entitled to apply the main residence exemption in relation to any capital gain made on the sale of that house. Detailed reasoning | Detailed Reasoning - Main Residence Exemption: Generally, any capital gain or capital loss that arises from a CGT event that happens to a dwelling that is a taxpayer's main residence is disregarded if the dwelling was the taxpayer's main residence for the entire period they owned it and has not been used to produce assessable income. If a taxpayer owns more than one dwelling during a particular period, only one dwelling can be their main residence at any one time. The exception to this rule is if you change main residences. | Detailed Reasoning - Main residence exemption - two units of accommodation: For the purposes of the main residence exemption, a dwelling has its ordinary meaning and specifically includes a unit of accommodation that is a building, or is contained in a building, and consists wholly or mainly of residential accommodation, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation. A dwelling can include more than one unit of accommodation if they are used together as one place of residence or abode. Taxation Determination TD 1999/69 (TD 1999/69) outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. Equally, a family that occupies more than one unit of accommodation might be considered to be occupying multiple residences that are independent dwellings. Whether two or more units of accommodation are used together as one place of residence or abode for the purposes of the definition of 'dwelling' is a question of fact that depends on the particular circumstances of each case. If the units of accommodation are used independently, or the use of them changes, then it will be unlikely that they will be considered to be one residence or dwelling. Where two units of accommodation are treated as one dwelling for the purposes of the main residence exemption, and provided they are disposed of under one CGT event and the main residence occupation tests are met, any capital gain or loss realised on the two units of accommodation is disregarded. Actually selling the units of accommodation to different buyers, or selling one and keeping another are significant indicators that they are two separate residences and dwellings. This determination is made at the time of the CGT event as this is when the capital gains provisions apply. Application to your situation You and your spouse moved into House B and have used the houses as your residences. Your spouse will transfer a specified percentage of their ownership interest in the houses to you in the future resulting in both you and your spouse having a specified percentage ownership interest in the each of the houses. House B will be subdivided into lots, with a house located on each lot. When the subdivision of House B is undertaken no CGT event will occur as you and your spouse will retain your ownership interests in the lots, being an ownership interest in each lot and the house located on the lot. However, you and your spouse intend selling one of the houses (the Sale House) and the lot on which it is located and will keep the other house/s which will continue to be your main residence/s after the Sale House is sold. A CGT event will occur on the sale of the Sale House. It is viewed that at the point of sale, the houses will be independent houses and only one of these houses can be your common law main residence at any particular time. While you and your spouse used the houses as your residences during your ownership periods, it is how the Sale House functioned at the time the CGT event occurs. That is, how was the Sale House being used when it is disposed of that will determine if the houses can be considered one dwelling. Based on the information provided, at the point of sale the houses will both constitute independent dwellings. As outlined above, with only a few exceptions only one of those houses can be your common law main residence at any particular time. As you are not selling the houses together it cannot be viewed that the houses can be viewed as a single dwelling. Therefore, as the sale of the Sale House is not the sale of your main residence, the main residence exemption will not apply. Therefore, you will be subject to the general CGT provisions on the sale of your ownership interest the Sale House and any capital gain or capital loss made on the sale of the Sale House will be calculated using the CGT provisions. Note: If you have held the ownership interests in two houses that make up the House B for longer than 12 months when the either of the houses are sold, and meet the other CGT discount conditions under Subdivisions 115-A and 115-B of the ITAA 1997, you can reduce any capital gain made on the sale of your ownership interests in the house that is being sold by applying the 50% CGT discount to the gross capital gain.