Private ruling: Capital Gains Tax - Main residence exemption
Date of advice: 22 September 2017
Published: February 2018
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the sale of Lot A subject to the capital gains tax (CGT) main residence exemption? | A1: No

Relevant facts and circumstances: You and your spouse acquired a Property with a dwelling as joint tenants. The land area is less than 2 hectares and includes a dwelling. Since its purchase the Property has been used as your main residence. The Property has not been used to produce any assessable income. You and your spouse signed a Contract of Sale to sell part of the Property being Lot A. The Contract of Sale provided a number of special conditions, including: A. Plan of Subdivision - The Purchaser acknowledges that as at the day of sale the plan of subdivision has not been certified by the relevant municipal authority nor has it been registered by the Registrar of Titles pursuant to the relevant law. The Vendor shall use their best endeavours and do all things reasonable required to expedite and procure the registration of the said plan pursuant to the provisions of the relevant law. B. Demolition of Dwelling - The Purchaser acknowledges that the whole property, being both lots A and B on the proposed plan of subdivision, has a dwelling constructed over the proposed lot boundaries. The Purchaser acknowledges that the dwelling will not be demolished before settlement of this contract and not make any requisition or objection or claim any compensation or rescind, terminate or delay completion of this contract as a result of the Vendor not demolishing and removing the dwelling before settlement. The Vendor undertakes to demolish the dwelling within two months of being notified in writing by the Purchaser that the Purchaser; a) is a builder who undertakes to start construction works at a specified time: or b) has engaged a builder to start works at a specified time. All costs associated with the proposed demolition will be borne by the Vendors. The Vendors hereby indemnify the Purchaser against any claims arising from the demolition. Subject to the Special Conditions in relation to the demolition of the dwelling, the Purchaser will permit the Vendor to occupy the dwelling that is constructed on proposed lots A and B from the date of completion until the date of demolition. Some months after the contract was signed settlement took place for Lot A. A couple of months after settlement, an invoice was issued for the demolition of the dwelling.

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 118-130 | Income Tax Assessment Act 1997 Section 118-165

Reasons for decision: Detailed Reasoning - Subdivision of land: If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax (CGT) purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision. However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis | Detailed Reasoning - Main residence exemption: CGT event A1 happens when you dispose of your ownership interest in a CGT asset to another party, such as when you sell land, as established in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Generally, you can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence (section 118-110 of the Income Tax Assessment Act 1997 ). To get the full exemption from CGT: ● the dwelling must have been your home for your entire ownership period ● you must not have used the dwelling to produce assessable income, and ● any land on which the dwelling is situated must be two hectares or less. Section 118-115 of the ITAA 1997 specifies that a dwelling includes: (a) a unit of accommodation that: (i) is a building or is contained in a building; and (ii) consists wholly or mainly of residential accommodation; and (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 1999/73 explains land under a unit of accommodation qualifies for the main residence exemption only if the land and the unit of accommodation are sold together as a dwelling. Taxation Determination TD 1999/69 provides that a ‘dwelling’ can include more than one unit of accommodation. But this still requires there to be units of accommodation, not a separated part of a house that does not meet the tests for a unit of accommodation listed in the ruling. Section 118-120 of the ITAA 1997 specifies that the main residence exemption can extend to adjacent land where: ● The same CGT event happens to both the land and the dwelling. ● The land was used primarily for private or domestic purposes in association with the dwelling. ● The total combined area for the dwelling and adjacent land is less than two hectares. Section 118-130 of the ITAA 1997 states you have an ownership interest in a dwelling if: ● for a dwelling that is not a flat or home unit – you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or ● for a flat or home unit – you have ● a legal or equitable interest in a stratum unit in it, or ● a licence or right to occupy it, or ● a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and gives you a right to occupy it. If you own more than one dwelling during a particular period, only one dwelling can be your main residence at any one time Section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to the sale of land if the CGT event (the disposal) does not also happen in relation to the dwelling. | Detailed Reasoning - Application to your circumstances: In your case, the part of the house on Lot A does not constitute a ‘dwelling’ in the terms of the ordinary meaning of the term, and in the context of the legislation. Taken with the words ‘unit of residence’, a ‘dwelling’ is a self-contained residence taken as a whole, not a part of a house or ‘unit of accommodation’. In this case, the ‘dwelling’ is on balance is considered to be the entire house. You and your spouse retained ownership of the dwelling after the sale of Lot A. Therefore, you did not dispose of the dwelling with the land within the same CGT event (the disposal). The lot sold contained a smaller part of the house and is not considered a unit of accommodation in its own right. Accordingly, the sale of Lot A (being land not sold with a dwelling) will not qualify for the main residence exemption and any capital gain made on the sale will not be disregarded. Furthermore, the contract of sale entered into to dispose of Lot A does not indicate that part of the dwelling was included in the sale. Additionally, Special Condition B indicates that you and your spouse held the right to reside in the dwelling until its demolition. We acknowledge your contentions and arguments, where you and your spouse could have disposed of the land by an alternative strategy; however this ruling is based on the facts of this scheme. The Commissioner does not have any discretion to assume that the disposal occurred in an alternative manner, whether or not that would have provided a different tax outcome in your situation.