• Main residence – compulsory acquisition

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The main residence exemption can apply to certain compulsory acquisitions (or similar arrangements) which are associated with your main residence but not with your dwelling.

    You can ignore a capital gain or capital loss you make from a compulsory acquisition (or similar arrangement) that happens only to land that is adjacent to:

    • a dwelling that is your main residence, or
    • a dwelling that passed to you as a beneficiary or trustee of a deceased estate.

    The main residence exemption will apply to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.

    The maximum area of vacant land covered by the exemption is two hectares less the area of land underneath the dwelling.

    This applies to CGT events that happen on or after 29 June 2011.

    You will also have the choice to apply the main residence exemption to CGT events that happen during the transitional period:

    • starting at the beginning of the 2004–05 income year, and
    • ending immediately before 29 June 2011.

    The main residence exemption applies to structures adjacent to a flat or home unit, such as a garage or a storeroom, in the same way as it applies to land adjacent to a dwelling.

    A partial CGT exemption may apply where the dwelling was:

    • not used as a main residence during all of the relevant ownership period, or
    • used for income-producing purposes.

    See Partial exemption and Dwelling used to produce income.

    The exemption for compulsory acquisitions of part of your main residence can apply to all the relevant CGT events, which is broader than the CGT events that the ordinary main residence exemption can apply to.

    What is compulsory acquisition?

    All levels of Australian government or entities acting on behalf of Government can compulsorily acquire land and associated structures or an interest in land for a public purpose.

    Compulsory acquisition involves your ownership interest in the land being compulsorily acquired by:

    • an Australian government agency (that is, by the Australian, a State or a Territory Government or by an authority of the Australian, a State or a Territory Government), or
    • a non-government entity authorised to do so under a power conferred by an Australian law.

    The acquirer serves a notice on the landowner inviting them to negotiate for the disposal of the asset or part of the asset. This notice should inform the landowner that if negotiations are unsuccessful, the acquirer will proceed to acquire the asset or part of the asset in accordance with its legislative powers. Even if the landowner accepts the initial or negotiated offer, this is viewed to be a compulsory acquisition. This type of negotiated disposal is referred to as an acquisition under the shadow of compulsion.

    This would typically involve:

    • compulsorily acquiring part of the land adjacent to your residence, or
    • compulsorily acquiring a structure such as a garage, storeroom or other structure associated with your flat or home unit.

    Arrangements similar to a compulsory acquisition include the following:

    • Your ownership interest in the land is compulsorily cancelled (however described), including compulsorily terminated or revoked.
    • Your ownership interest in the land is varied (however described), for example, removing your ownership right to further develop the main residence. It could restrict your ability to erect structures above a certain level, for example installing antennas or remove your right to dig below the soil inhibiting your ability to undertake any further structural development of the property.
    • Your ownership interest in the land is surrendered (however described) or varied (however described) under the shadow of compulsion.
    • An interest or right in, or relating to, your land is compulsorily conferred on an Australian Government agency or an entity under a power conferred by an Australian law, for example, compulsorily creating a right of access over part of land adjacent to your dwelling.
    • You confer on an entity an interest in, or right in, or relating to, your land under the shadow of compulsion, for example, compulsorily negotiating an agreement in relation to a temporary right in relation to your main residence. Government could require temporary access through your property to improve property that is used for a public purpose.
    • Your ownership interest in the land was conferred on you by an Australian Government agency for a limited, but renewable period of operation, and that ownership interest was not renewed by that agency. For example, a right that you hold over the land is not renewed, such as a Crown lease.

    The exemption does not apply to compulsory acquisitions, or similar arrangements, of adjacent land or a structure where the dwelling to which they relate is outside Australia.

    Example 95: full main residence exemption

    Debbie and Geoff live in a three bedroom house on a small suburban block that is two hectares. In July 2008, the Department of Main Roads commenced negotiations with several home owners in Debbie and Geoff’s neighbourhood to end ownership rights over part of the land adjacent to the dwelling. When their ownership rights end, Debbie and Geoff along with other home owners would not be able to build on that part of the land or conduct any activities on that part of the land.

    The area adjacent to their dwelling on which their ownership right ends is 50 square metres (10 metres wide by 5 metres located along the rear boundary)

    They qualify for full main residence exemption because they have lived in the dwelling throughout their ownership period. This means Debbie and Geoff would be able to apply the main residence exemption to the proceeds they received for the compulsory acquisition which ended their ownership rights.

    End of example

    Choosing how much of the land and associated structures will be part of your main residence

    If your property exceeds two hectares you will need to determine how much and which parts of your property will form part of your main residence exemption area.

    If the land used for private purposes is greater than two hectares, you can choose which two hectares are exempt.

    Example 96: land exceeds 2 hectares

    Robyn’s property is 10.35 hectares. She identifies the dwellings, land and associated structures that are linked to the main residence and are for private or personal use. The driveway was 1500 square metres in area which means that the calculation is greater than two hectares. Robyn decides to exclude 500 square metres of driveway to ensure that the total area of the land is not greater than two hectares.

    End of example

     

    Hectares

    Main Residence

    0.03453

    Swimming pool

    0.004416

    Dam 1 (pump water to landscaped gardens)

    0.35

    Garage

    0.01

    Guest house

    0.01531

    Driveway

    0.1

    Landscaped gardens

    1.485744

    Total

    2.00

     gen28207a.gif

    Choosing how much land will be part of your main residence when it exceeds two hectares

    Maximum exempt area

    Where you have previously disregarded one or more capital gains or losses for a compulsory acquisition (or similar arrangement) of adjacent land or structure, the maximum area of adjacent land available for the main residence exemption when the dwelling is eventually sold (or otherwise realised) is reduced. The reduced area is called the ‘maximum exempt area’.

    However the maximum exempt area is only reduced by a previous compulsory acquisition or similar arrangement where you lost rights to the substantial use and enjoyment of that land either completely or for at least 10 years.

    This rule ensures you are not disadvantaged by having to reduce your maximum exempt area where you have lost only insubstantial rights to the use and enjoyment of the exempt land. It also ensures that you are not disadvantaged where you lose substantial rights to the use and enjoyment of the exempt land but only for a short term such as under a short-term lease. This means that such land will remain eligible for a later application of the main residence exemption.

    Examples of compulsory arrangements that do not result in substantial loss of rights to the use and enjoyment of the land might include where an easement is granted over vacant land which still permits the use and enjoyment of the land. Another example might be where the Government compulsorily acquires subsurface land under your main residence. If you did not use or enjoy the subsurface land and the compulsory acquisition did not result in you losing rights to the substantial use and enjoyment of the surface land, then the maximum exempt area would not be reduced.

    Example 97: Reduction in maximum exempt area

    In January 2005, the Government contacted Robyn and advised that they are acquiring 1.40 hectares of her land for the development of a freeway. Part of this acquisition includes the dam and landscaped gardens Robyn had identified as being part of the main residence. The area of the acquisition includes 0.40 of a hectare of Robyn’s main residence.

    Robyn may choose to apply the main residence capital gains tax exemption to the part of the capital proceeds, received for the compulsory acquisition, which relates to the 0.40 hectares of the land Robyn had recorded as being associated with the main residence.

    After the compulsory acquisition Robyn’s property is reduced to 8.95 hectares. The dam and part of her landscaped gardens were acquired by the Government for the freeway. Robyn is not able to revise the land and structures that are associated with her main residence. Her maximum exempt area is reduced by the 0.4 hectares she had previously attributed to her main residence that was acquired by the Government.

    End of example

     

    Hectares

    Main Residence

    0.03453

    Swimming pool

    0.004416

    Garage

    0.01

    Guest house

    0.01531

    Driveway

    0.1

    Landscaped gardens

    1.435744

    Total

    1.6

     gen28207b.gif

    Exemption conditions to be met

    Where you satisfy all of the following conditions any capital gain or capital loss arising from the compulsory acquisition (or similar arrangement) of adjacent land or structure without the dwelling is automatically disregarded.

    The conditions that must be met are:

    • you are an individual
    • the exempt land is all or part of a dwelling’s adjacent land at the time of the CGT event
    • the CGT event does not happen in relation to the dwelling or your ownership interest in the dwelling
    • one of the following applies
    • the dwelling was your main residence during some or all of the period you owned it
    • your ownership interest in the dwelling passed to you as a beneficiary in a deceased estate, or
    • you own the ownership interest in the dwelling as the trustee of a deceased estate
    • the adjacent land or structure is compulsorily acquired or is the subject of a similar compulsory arrangement, and
    • the sum of the following is two hectares or less
    • the area of all of the dwelling’s adjacent land at the time of the CGT event
    • the area of land on which the dwelling is built, and
    • for each earlier CGT event that resulted in a capital gain or capital loss being disregarded under this exemption, the area of adjacent land exempted at the time of the earlier CGT event, but only if that involved reducing the area of the dwelling’s adjacent land at the time of that earlier CGT event.

    This last condition ensures that you will not be disadvantaged by double counting of the same area of land where you have not lost substantial use and enjoyment of the land, for example, a compulsory easement is created over land but you retain ownership of the land affected by the easement, although with diminished rights.

    Where you satisfy all of the conditions apart from the last condition (that is, where the sum of the relevant areas of land is more than two hectares), there is no automatic disregarding of any capital gain or capital loss arising from the compulsory acquisition (or similar arrangement).

    In these circumstances, you can choose to disregard so much of the capital gain or capital loss that relates to an area of adjacent land that is compulsorily acquired (or subject to a similar arrangement) that is not more than the maximum exempt area.

    Record keeping requirements

    With all assets you need to keep records. In this case, you will need to keep records of the transactions or events that provide evidence of your assessment of how the main residence capital gains tax exemption applies to the part of your main residence that has been compulsorily acquired. This includes a record of your calculations of your capital gain or loss and if your property is greater than two hectares.

    To find out more about the recordkeeping requirements in relation to assets and capital gain tax see Keeping records.

    Choosing during the transitional period

    A taxpayer who makes a choice to apply the exemption during the transitional period must do so:

    • by the day they lodge their income tax return for the income year that includes the commencement day, or
    • within further time allowed by the Commissioner.

    The way a taxpayer prepares their tax return for the applicable income year is sufficient evidence of them making a choice.

    However, this does not preclude a taxpayer from making a choice or providing evidence of a choice in a way other than the way they prepare their income tax return for the applicable income year.

    For example, lodging an objection to an assessment in the transitional period would also be sufficient evidence of them making a choice if the basis of the objection were to apply the main residence exemption to CGT events happening in the transitional period.

    The time limit for amending assessments is also extended in cases where a taxpayer wishes to take advantage of the exemption, but their amendment period has expired. The extension to the time limit for amendments will apply where:

    • the assessment was made before the commencement day
    • the amendment is made within the period ending two years after 29 June 2011, and
    • the amendment is made to take advantage of the exemption for CGT events that happen during the transitional period.

    This means that if a compulsory acquisition occurs in the transitional period and the taxpayer’s amendment period has expired for the income year in which the relevant compulsory acquisition occurred, there is a two year time limit from 29 June 2011 in which the taxpayer can seek an amended assessment.

    The Commissioner may amend an assessment for the purpose of giving effect to the exemption after the end of the two year period where the taxpayer has requested the amendment before the end of the two year period.

    Last modified: 08 Jul 2015QC 44187