Private ruling: Main residence exemption and retirement exemption
Date of advice: 1 August 2018
Published: September 2018
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will you be entitled to a full main residence exemption for the five acres of land that contains the two dwellings? | A1: No. | Q2: Will you be entitled to a partial main residence exemption for the five acres of land that contains the two dwellings? | A2: Yes. | Q3: Are you entitled to claim the retirement exemption on the sale of the remaining XX acres of land? | A3: Yes. Having considered your circumstances and the relevant factors the Commissioner has determined that the disposal of the business will be eligible for the retirement exemption under subdivision 152-D of the ITAA 1997 under the capital gains tax small business concessions. Further information on the retirement exemption can be found on our website ato.gov.au and entering Quick Code QC 52290 into the search bar at the top right of the page.

Relevant facts and circumstances: You purchased XX acres of vacant land (the property) in late 20AA. You purchased the property for $XX. You immediately started to build dwelling A at the cost of $XX. Dwelling A was completed and became your main residence in early 20BB. Dwelling A remained your main residence until late 20CC when you moved into Dwelling B that was newly constructed on the property. This new dwelling cost $XX. Dwelling A and B sit on the same five acres of land. Dwelling A has been rented to a third party since you moved out in late 20CC. A valuation of the property has stated that the whole property is worth $XX. The vacant XX acres of farmland is approximately $XX and the five acres containing dwelling A and B is worth approximately $XX. You conduct primary production activities on the land. From late 20AA until mid 20DD you used all XX acres of your property for your primary production activities. From mid 20DD to late 20EE you used XX acres of your land for your own primary production activities and XX acres of land for cattle agistment. From late 20EE to current you are using X acres of your land for your primary production activities and XX acres of land for cattle agistment. The reason for scaling back you primary production activities was due to crop losses caused by a plant parasite. You are both under currently under the age of 55. When you receive the capital proceeds you will put it into your superannuation account.

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 118-185 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Section 152-35

Reasons for decision: Detailed Reasoning - Main Residence exemption: The capital gains provisions apply when you dispose of a capital gains tax asset such as your home. You make a capital gain if your capital proceeds exceed the cost base of your asset. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Certain capital gains and capital losses are disregarded when working out whether a net capital gain is to be included in your assessable income. As a rule, you can disregard any capital gain or capital loss that you have realised on the disposal of a dwelling that was your main residence. To be entitled to the full exemption; however: ● the dwelling must have been your home for the whole period you owned it; ● the dwelling must not have been used to produce assessable income; and ● any land on which the dwelling is situated must be two hectares or less. The term 'dwelling' means a building that consists wholly or mainly of residential accommodation. It also includes the land immediately under the accommodation. Your land contains two dwellings. You occupied dwelling A until 20CC and occupied dwelling B from 20CC, when it was built, until sale. As the two dwellings are on the same two hectares of land, there is a need to determine whether the two units of accommodation should be treated as a single dwelling. Taxation Determination TD 1999/69 considers the situation where more than one unit of accommodation can constitute a dwelling for the purposes of the main residence exemption. Generally, if the buildings are used together as one place of residence or abode they will be considered as one main residence. The question of whether they are considered one place of residence is a question of fact and will be determined by considering a number of factors including: ● whether the occupants sleep, eat and live in them; ● the distance between and the proximity of the units of accommodation; ● whether the units are connected; ● whether the units are capable of being sold separately; ● the extent to which the daily activities of the occupants in the unit are integrated; ● how the units are shared; and ● how the costs of the units are shared by the occupants. In your case, when you purchased the land you built dwelling A to live in. In 20CC you then built dwelling B as you needed more room. When you moved into dwelling B you began renting dwelling A to a third party. It is recognised that in most cases, the main residence exemption can only apply to one dwelling at a time. For the purposes of the main residence exemption, and in accordance with the guidelines contained in TD 1999/69 we consider that your use of the two residential dwellings doesn’t allow the main residence exemption to be applied to both dwellings as if they were the one dwelling. It is therefore considered that the separate dwellings located on your property may not be treated as a single dwelling for the purposes of the main residence exemption. You will be eligible for a partial main residence exemption under section 118-185 of the ITAA 1997. The portion of area that consists of dwelling A is the area that will not be exempt from capital gains tax.