Private ruling: Capital gains tax - main residence exemption - two dwellings - disposal
Date of advice: 13 April 2016
Published: June 2016
Ruling period: Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to a full main residence exemption upon the disposal of 'X'? | A1: No | Q2: Are you entitled to a partial main residence exemption upon the disposal of 'X'? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | 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: Summary: Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) provides an exemption for a capital gain or capital loss from certain CGT events that happen in relation to an individual's main residence. The general rule is contained in section 118-110 of the ITAA 1997 which provides that a capital gain or capital loss that an individual makes from the disposal of a dwelling is disregarded if the dwelling was the individual's main residence throughout the period it was owned. Section 118-185 of the ITAA 1997 allows a partial main residence exemption where the dwelling is the individual's main residence for only part of the ownership period. Generally, access to the exemption is based on the common law definition of main residence. This definition may be extended or limited by other provisions in Subdivision 118-B of the ITAA 1997. A dwelling includes a unit of accommodation that is a building or is contained in a building, and consists wholly or mainly of residential accommodation (section 118-115 of the ITAA 1997). 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. Taxation Determination TD 1999/69 outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. These 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. For a flat or home unit, the main residence exemption also applies to a garage, storeroom or other structure that is associated with it to the extent that the structure is used primarily for private or domestic purposes in association with the flat or home unit (section 118-120 of the ITAA 1997). However, if the other structure is disposed of separately from the rest of the dwelling, then the exemption is not available in respect of that disposal (section 118-165 of the ITAA 1997). That is, the main residence exemption will only be extended where they are disposed of at the same time, under the one contract, to the same purchaser. The subdivision of a property creates a new asset and the cost base of the original property needs to be apportioned between the subdivided blocks on a reasonable basis. The Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks (that is, on an area basis or relative market value basis). A reasonable apportionment of the original cost of the land itself can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case. Your situation You bought the property and made some improvements to it. You have sold one part while keeping the remainder. As at the point of sale, the two parts both constitute independent dwellings. The capital gains provisions consider this matter at the point of sale (settlement) as that determines what you have actually sold. (It doesn't matter that the contracts were signed before the subdivision was complete.) Therefore, you are required to apportion your original acquisition costs between property B (and the land on which it is situated) and property A. (Taxation Determination TD 97/3) You similarly apportion other expenses (except those that specifically relate to a particular subdivided property). In your case, there were two dwellings at the point of sale and only one of these dwellings can be your common law main residence at any particular time. Therefore, we need to consider which of the properties was your main residence during the period you owned property A. During the period that you occupied the whole of the original property, the larger part is now property B and the only part of property A that existed back then was actually a shop that you used as a living room. Consequently, it is considered that property B was your common law main residence for the whole of this period. After the renovations, property A was rented to a tenant and was not your common law main residence. You are not entitled to any main residence exemption as property A has not been your main residence during any part of your ownership period. Note: As you have owned your property for longer than 12 months, you can discount any capital gain by 50%.

Relevant facts: You acquired a property located in Australia. | The property was a number of square metres in size. | The property comprised two structures with different street addresses (Property A) and (Property B) | The properties were registered on one title. | Property A was previously used as a shop. | You used property A as a living room; it was approximately a number of square metres in size. | You undertook some renovations to property A and property B around November 20VV. | The renovations to property A were such that you were able to enter into a lease with a tenant who was the subsequent purchaser as it was now a two bedroom property. | The renovations to property A increased the size from a number of square metres to a greater numbers of square metres in total. | You entered into the lease in 20WW. | You listed property A for sale and contracts were exchanged in 20XX. | The subdivision of the property was completed in 20YY. | Settlement of the contract for sale of property A occurred after a period of time.