Private ruling: Capital gains tax - disposal of property - two dwellings - land exceeds two hectares
Published: April 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you liable for capital gains tax (CGT) on the disposal of your property? | A1: Yes. | Q2: Are both dwellings considered to be one principle residence? | A2: No. | Q3: Are you entitled to the main residence exemption on the disposal of house and land of up to two hectares attached to the house? | A3: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You purchased a property after 20 September1985. The property consists of more than two hectares with two dwellings on it, the main house (the house) and flat (the flat). You moved into the house and established the property as your main residence. The flat is situated more than five metres from the house. The flat is used by you and your partner on an ad hoc basis for sleeping purposes to allow you or your partner to get a good night's sleep as you have a young child. The flat is fully self-contained. The flat is used by your family and friends when they come to visit you and your family. You are disposing of the property.

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

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The most common CGT event is a CGT event A1 which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs. | Detailed Reasoning - Main residence: Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption: · the dwelling must have been your home for the period you owned it · 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. 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 and any land immediately underneath the unit of accommodation. If you treat the interest in a dwelling as your main residence you are unable to treat an interest in another dwelling as your main residence. The main residence exemption also applies to the surrounding total land area on which the dwelling stands on up to two hectares which is used primarily for private and domestic purposes in association with the dwelling. You can choose which two hectares is exempt, but cannot include the other dwelling situated on the property. | Detailed Reasoning - Land exceeds two hectares: If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of the land by apportioning the capital proceeds and the cost base and reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is greater or less in value than your selected area of land. If your selected area of land cannot be separately valued, your capital gain or capital loss, the remainder of the land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on a area basis. | Detailed Reasoning - Cost base: The cost base of a CGT asset is made up of five elements: 1. money or property given for the asset 2. incidental costs of acquiring the CGT asset or that relate to the CGT event 3. costs of owning the asset (interest, rates) 4. capital costs to increase or preserve the value of your asset or to install or move it, and 5. capital costs of preserving or defending your ownership of or right to your asset. | Detailed Reasoning - Two units of accommodation: Taxation Determination TD 1999/69 considers the situation where more than one unit of accommodation can constitute a dwelling for the purpose of the main residence exemption. When two or more units of accommodation are used together as one place of residence we need to consider the facts in each individual's case. Some of the facts we consider are: 1. whether the occupants sleep, eat and live in them 2. the distance between and the proximity of the units of accommodation 3. whether the units are connected 4. whether the units are capable of being disposed of separately 5. the extent to which the daily activities of the occupants in the units are integrated 6. how the units are shared by the occupants, and 7. how costs of the units are shared by the occupants. Taking into consideration all of the facts of your arrangement it is considered that you do not satisfy all the requirements that the house and the flat are used as one unit of accommodation or residence. We consider the house and the flat are two separate units of accommodation for the following reasons: · you and your spouse only use the flat on an ad hoc basis · the flat is not used as sleeping accommodation for your family members on a permanent basis · the house and the flat are completely self-contained · the flat is used by your family and friends when they visit, and · even though the house and the flat are on the one title it does not restrict you from using the flat to produce assessable income. We consider the house to be your main residence. Therefore, any capital gain or capital loss made on the disposal of the house and adjacent land up to two hectares is disregarded under the main residence provisions. However, you will be subject to CGT on the disposal of the flat and remainder of the land. The proceeds from the disposal of the house and the flat will need to be apportioned between the two on a reasonable basis. You can use the discount method to calculate your capital gain as you meet all the relevant criteria. The discount percentage is 50% for individuals. For further information on how to calculate your capital gain or capital loss please see the enclosed information - this information has been taken from the Guide to capital gains tax 2011-12 (NAT 4151). Information is also available on our website - www.ato.gov.au.