Private ruling: Capital gains tax
Date of advice: 30 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a partial main residence exemption on the disposal of your property? | A1: Yes. | Q2: If the answer to Question 1 is yes, is the dwelling, in respect of which the capital gain made by you is disregarded, the Granny Flat Area? | A2: Yes. | Q3: If the answer to Question 2 is yes, in determining the extent of the capital gain, is it appropriate to apportion your cost base for the property and your capital proceeds on disposal of the property based on the extent to which the land area of the property is comprised of the Granny Flat Area? | A3: Yes.

Relevant facts and circumstances: You acquired a property. Situated on the property are two structures: 1. A primary residential structure (house); and 2. A secondary structure (granny flat) You commenced residing exclusively in the granny flat and proceeded to rent out the house. You purchased the property with the intention that it would be your main residence, and intended to occupy the granny flat area as your home indefinitely. You moved into the granny flat area with your personal belongings, changed your address on the electoral roll to the property, arranged for your mail to be delivered to the property, and connected utilities to the property in your name. To enable the house and granny flat to be occupied as distinct areas of the property of the property, you also: 1. Installed a side gate; 2. Established a separate water connection to enable independent use of water services between the house and granny flat; and 3. Installed a separate electricity meter for the granny flat to enable separate electricity supply and billing by the utilities providers Under the terms of the lease for the house, the tenants were entitled to exclusive possession of the house and the front yard. You, as the occupant of the granny flat, retained the exclusive right to occupy the granny flat, the driveway and the rear yard. The granny flat and the area you use in conjunction with it (Granny Flat Area) represents approximately X% of the total land area of the property. Having resided in the granny flat for approximately six months, you vacated the property entirely and rented out the granny flat, with the house still being rented out separately in the meantime. Less than six years later, you moved back into the Granny Flat Area. The house remained tenanted at this time. A couple of years later you vacated the granny flat again. You sold the property less than six years after you vacated the property for a second time. For the entire period of ownership of the property, you did not own any other real property.

Relevant legislative provisions: 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 118-145

Reasons for decision: Detailed Reasoning - Main residence: Generally, you can disregard any capital gain or capital loss realised on the disposal of a dwelling that was your main residence. Generally, to get the full exemption from capital gains tax (CGT) the following conditions must be met: ● you are an individual; ● you moved into the dwelling as soon as practicable; ● the dwelling must not have been used to produce assessable income; and ● the dwelling was your main residence throughout your ownership period. For the purpose of the main residence exemption, 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, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation (section 118-115 of the ITAA 1997). | Detailed Reasoning - Adjacent land: The main residence exemption can apply to land which is adjacent to your main residence to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption must not exceed 2 hectares (section 118-120 of the ITAA 1997). | Detailed Reasoning - The absence rule: The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence. This choice needs to be made only for the income year that the CGT event happens to the dwelling for example, the year that a taxpayer enters into a contract to sell it. If a taxpayer owns both a dwelling that they can choose to treat as their main residence after they no longer live in it, and a dwelling they actually lived in during that period of time then they make the choice for the income year they enter into the contract to sell the first of those two dwellings. If a taxpayer makes this choice, they cannot treat any other dwelling as their main residence for that period. If a taxpayer uses their dwelling to produce income, for example, they rent it out or it is available for rent, they can choose to treat it as their main residence for up to six years after they stop living in it. | Detailed Reasoning - Application to your circumstances: In your case, you purchased a property and you established the granny flat as your main residence and rented out the house. You then vacated the granny flat and rented it out for a period of less than six years before returning to live in the granny flat. You later vacated the granny flat again before selling the property less than six years after you vacated. You continued to treat the granny flat as your main residence during the periods you were absent. We consider that the granny flat continued to be your main residence during your entire ownership of the property for the purposes of the main residence exemption. Therefore, any capital gain or loss made on the disposal of the granny flat and adjacent land up to two hectares that was used for private or domestic purposes in relation to the granny flat is disregarded under the main residence provisions. The area of the property that comprised of the Granny Flat Area is considered to be adjacent to the granny flat. However, you will be subject to CGT on the disposal of the house and the remainder of the land. The proceeds from the disposal of the house and the granny flat will need to be apportioned between the two on a reasonable basis. Apportioning the capital gain or loss based on land area is considered to be a reasonable basis of apportionment.

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