Private ruling: Income tax - Capital Gains Tax: Main residence exemption
Date of advice: 5 August 2016
Published: September 2016
Ruling period: 1 July 20DD to 30 June 20CC
Date scheme commenced: During the income year ended 30 June 20CC

Ruling: Q1: Do the Y residential units transferred to the taxpayer by the Trust constitute one 'dwelling' as defined in section 118-115 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the taxpayer be entitled to the main residence exemption under Subdivision 118-B of the ITAA 1997 to fully disregard a capital gain or loss made from the sale of the Y residential units under one contract? | A2: Yes, subject to the application of section 118-145 of the ITAA 1997.

Relevant facts and circumstances: The Trust purchased Y commercial properties during the quarter ended 30 June 20AA. Upon its acquisition, the Trust held these properties as capital assets and used them for rental purposes (i.e. as office and storage areas). The Trust subsequently obtained information on the development potential of the premises from the local council and, based on that information, decided to undertake a property development project on them. The Trust then proceeded to purchase an adjacent property and commenced the subdivision and development of a number of residential apartments (the development) by lodging a subdivision development application with the local council during the 20BB income year. The development involved the construction of Z new residential units, X of which were sold for profit in the 20CC income year. The applicant has advised that the development was planned, organised and carried out in a business-like manner by the Trust, as evidenced by the following factors: • a feasibility of project profit was prepared and evaluated pre-commencement of the development • the development was conducted from an office with sales, expenses, invoices, receipts and accounts all being properly recorded • the development had a business-like employment structure employing a team of people including a site foreman, a project manager, a bookkeeper, an administrative officer, and sales and marketing staff • the sales of the residential units and the building works were properly documented in written contracts/agreements • GST was charged on the sales of the residential units, and • supplies of materials were ordered through a supplier trade credit account. In her/his capacity as director of trustee company, the taxpayer, who has approximately 20 years of experience as a builder/developer and holds a Relevant State builder licence and a membership of Master Builders Association: • worked full time on the development, spreading her/his time between the construction site and her/his office • was the sole decision maker of all day-to-day development activities, and • supervised the process of purchases, the subcontracting of tradesman and their works, and the payment of the development and construction costs. The Trust is a discretionary trust and the beneficiaries are the taxpayer, her/his spouse and their children. Legal ownership of Y of the residential units within the development was transferred by the Trust to the taxpayer at cost price during the 20CC income year. The market value of these Y residential units was significantly higher than the cost price paid by the Trust. The Y residential units transferred to the taxpayer were never developed or held by the Trust for the purposes of sale at any stage of the development. The taxpayer and her/his family moved into the Y residential units as their main residence during the 20CC income year upon their transfer. The taxpayer and her/his family occupied the Y residential units for more than five months until April 20CC, at which time he and her/his family moved out of the Y residential units and rented them out as rental properties (i.e. for the purpose of producing assessable income). The Y residential units are on separate titles and are the only Y units on the same level of a unit block on the development. There are no other residences or units on that level. The Y residential units adjoin and are connected by a common hallway which is private and not accessible to the public or others residing in any of the X residential units sold by the Trust. The elevator door on that level has a security door with keys that were only available to the taxpayer and her/his family. Internal doors and what would normally be the usual front doors of the Y residential units are situated two meters away from each other and they were left open as a matter of usual practice. The taxpayer paid for all expenses on behalf of her/his spouse and children who resided in the Y residential units on a daily basis. The whole family used one residential unit primarily as a bedroom area and the other one as living area. The Y residential units may be sold separately but can be sold together under one contract.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Paragraph 118-110(2)(a) | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Subsection 118-115(1) | Income Tax Assessment Act 1997 Section 118-125 | Income Tax Assessment Act 1997 Section 118-140 | Income Tax Assessment Act 1997 Subsection 118-140(1) | Income Tax Assessment Act 1997 Subsection 118-140(2) | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Subsection 118-145(1) | Income Tax Assessment Act 1997 Subsection 118-145(2) | Income Tax Assessment Act 1997 Subsection 118-145(3) | Income Tax Assessment Act 1997 Subsection 118-145(4) | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Summary: The Y residential units transferred to the taxpayer by the Trust constituted one dwelling for the purposes of section 118-115 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Dwelling is defined in subsection 118-115(1) of the ITAA 1997 to include: (a) a unit of accommodation that is a building or is contained in a building and which consists wholly or mainly of residential accommodation (b) a unit of accommodation that is a caravan, houseboat or other mobile home, and (c) any land immediately under the unit of accommodation. Taxation Determination TD 1999/69 confirms that more than one unit of accommodation can constitute a dwelling as defined in section 118-115 of the ITAA 1997 where the units of accommodation are used together as one place of residence or abode. Whether Y 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. As per paragraph 4 of TD 1999/69, factors relevant in considering whether units of accommodation are used together as one place of residence or abode include: (a) whether the occupants sleep, eat and live in them (b) the distance between and the proximity of the units of accommodation (c) whether the units are connected (d) whether the units are capable of being sold separately (e) the extent to which the daily activities of the occupants in the units are integrated (f) how the units are shared by the occupants, and (g) how costs of the units are shared by the occupants. In the taxpayer's circumstances, although the Y residential units are capable of being sold separately, the fact they're connected and her/his family living arrangements and activities were closely integrated means that the majority of the above factors are satisfied. Therefore, both of the units were considered to be occupied by the taxpayer and her/his family as one dwelling for the purposes of section 118-115 of the ITAA 1997. | Summary: The taxpayer may, subject to the application of section 118-145 of the ITAA 1997, elect to use the main residence exemption under subdivision 118-B of the ITAA 1997 to fully disregard a capital gain or loss made from the sale of the Y residential units under one contract. | Detailed Reasoning - Detailed reasoning: Section 118-110 of the ITAA 1997 sets out the 'basic' situation in which a capital gain or capital loss made from a CGT event that happens to a dwelling, or a taxpayer's ownership interest in it, will be disregarded. Essentially, the capital gain or loss will be fully exempt where: • the taxpayer involved is an individual • the dwelling was the individual's main residence throughout their ownership period • the individual did not acquire the ownership interest either as a beneficiary or trustee of a deceased estate, and • the CGT event is a relevant CGT event. 'Ownership period' is defined in section 118-125 of the ITAA 1997 to mean the period on or after 20 September 1985 when a taxpayer had an ownership interest in either: (a) the dwelling, or (b) land (acquired on or after 20 September 1985) on which the dwelling is later built. The taxpayer has an ownership interest in the Y residential units (together constituting a single dwelling as confirmed in response to question 1). The taxpayer's ownership period of that dwelling begun when that dwelling was transferred to him by the Trust, and will end on the date the dwelling is disposed of. Generally (and subject to certain rules under Subdivision 118-B of the ITAA 1997 which may apply - including the rule under section 118-145 discussed below), a capital gain or capital loss made by an individual taxpayer (who has not acquired their dwelling as a beneficiary or trustee of a deceased estate) from a CGT event that happens to their dwelling, or the taxpayer's ownership interest in it, will only be partially disregarded where the dwelling was their main residence for only part of their ownership period (section 118-185 of the ITAA 1997). Section 118-145 of the ITAA 1997 sets out a rule to extend the main residence exemption in the event of absences and states that: | Detailed Reasoning - 118-145(1): If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. | Detailed Reasoning - 118-145(2): If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence. | Detailed Reasoning - subsection 118-145(3): If you do not use the dwelling for that purpose, you can treat it as your main residence under this section indefinitely. … | Detailed Reasoning - subsection 118-145(4): If you make the choice, you cannot treat any other dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies. Section 118-140 of the ITAA 1997 states: | Detailed Reasoning - 118-140(1): If you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of: (a) 6 months ending when your ownership interest in your existing main residence ends; or (b) the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends. | Detailed Reasoning - 118-140(2): Subsection (1) only applies if: (a) your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and (b) your existing main residence was not used for the purpose of producing assessable income in any part of that 12 month period when it was not your main residence. In this case, the taxpayer and her/his family have occupied the Y residential units as a main residence for more than five months, then moved out and rented the Y units out as rental properties. Despite having moved himself and her/his family out of the Y residential units, the taxpayer may choose to continue to treat the Y units (a dwelling) as her/his main residence as long as he doesn't contemporaneously treat any other dwelling as her/his main residence (outside of the limited circumstances to which section 118-140 of the ITAA 1997 applies): subsections 118-145(1) and (4) of the ITAA 1997. As the taxpayer has since used the dwelling for the purpose of producing assessable rental income, the maximum period that she/he can treat the Y residential units as her/his main residence pursuant to section 118-145 of the ITAA 1997 while she/he uses it for that purpose is 6 years: subsection 118-145(2) of the ITAA 1997. The sale of the Y residential units under one contract will give rise to a CGT event A1, being a relevant CGT event to which the main residence exemption can apply (paragraph 118-110(2)(a) of the ITAA 1997). The main residence exemption will therefore apply to fully disregard any capital gain or capital loss realised by the taxpayer upon the sale where the dwelling will (at the time of sale) have continued to have been treated as the main residence of the taxpayer pursuant to an application of section 118-145 of the ITAA 1997.