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Ruling

Subject: Capital gains tax and main residence - land exceeding 2 hectares

Question 1

Will you be entitled to main residence exemption upon disposal of your dwelling?

Answer

Yes.

Question 2

Are you entitled to include up to 2 hectares of land with your dwelling in order to obtain main residence exemption?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You and your spouse purchased a vacant block of land after 20 September 1985.

The land area exceeds 2 hectares.

You and your spouse constructed a dwelling. The dwelling was completed within four years of you purchasing the vacant land and you moved into the dwelling as soon as construction was completed. You and your spouse also constructed several sheds, stockyards and fencing.

You choose to treat the land as your main residence between purchase of the vacant land and moving into the dwelling.

No portion of the property has been used to produce assessable income.

A Real Estate agent has valued the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 118-120,

Income Tax Assessment Act 1997 Section 110-35,

Income Tax Assessment Act 1997 Subsection 110-25(4) and

Income Tax Assessment Act 1997 Section 118-150.

Reasons for decision

Question 1

Main residence

The most common capital gains tax (CGT) event is a CGT event A1. This occurs when you transfer ownership from yourself to another entity. When you dispose of your property, a CGT event A1 will occur.

Generally, you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that was your main residence.

To obtain the main residence exemption from CGT:

· you must be an individual;

· the dwelling must have been your home for the whole period you owned it;

· must not have used the dwelling to produce assessable income; and

· you may include up to 2 hectares of adjacent land.

When you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling becomes your main residence. However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence.

You can choose to have this exemption is you acquire an ownership interest in land and you build a dwelling on the land. There are conditions that you must satisfy before you can claim the exemption. You must finish building the dwelling and then;

· move into the dwelling as soon as practicable after it is completed; and

· continue to use the dwelling as your main residence for at least 3 months after it becomes your main residence.

In you case, you and your spouse are individuals, you have lived in the dwelling for the entire period of ownership, you have not used the dwelling to produce assessable income and you will select the dwelling and a portion of the land, including the land under the dwelling, to apply the main residence exemption to. You purchased the vacant land after 20 September 1985 and commenced construction. The dwelling was completed within four years of you purchasing the vacant land and you moved in as soon as the dwelling was completed. You will be entitled to the main residence exemption on the portion of the property you select.

Question 2

Land exceeding 2 hectares

Taxation Determination TD 1999/67 provides that a taxpayer can apply the main residence exemption to whichever 2 hectares of the property they choose (as long as they include the area of land on which the dwelling is built). In this case, as the total area of the property exceeds two hectares, the remainder will be subject to CGT.

Where a property exceeds 2 hectares, Taxation Determination TD 1999/67 states at paragraphs 3 to 5: 

3. If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land.

4. If your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis.

5. The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances.'

You may obtain an acceptable valuation for CGT purposes to determine the market value of the asset by either:

obtain a detailed valuation from a qualified valuer; or,

compute your own valuation based on reasonably objective and supportable data.

Example: A taxpayer owns a unit in a block of 10 units and needs to obtain its market value for CGT purposes. The taxpayer chooses not to approach a qualified valuer in this case. A valuation based on contemporaneous sales of similar units in that block of units would be acceptable.

Cost base

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

There are 5 elements:

First element - Money or property given for the asset

Second element - Incidental cost of acquiring the CGT asset or that

relate to the CGT event

Third element - Cost of owning the asset

Fourth element - Capital costs to increase or preserve the value of

your asset or to install or move it

Fifth element - Capital costs of preserving or defending your

ownership of or rights to your asset.

The third element relates to the costs of owning an asset include rates, land taxes, repairs and insurances premiums. Non-deductable interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value. However, you do not include such costs in the cost base if you acquired the asset before 21 August 1991. In your situation, you acquired the property prior to 21 August 1991 .

The fourth element relates to is capital costs you incurred for the purpose of increasing or preserving the asset's value. This includes capital costs you incurred that relate to installing or moving an asset. In your case, you have erected fencing, stockyards and several sheds. You are entitled to add these costs to your cost base.

Example

Alistair owns a 10 hectare property - see the diagram below. He has selected the shaded area as the part of the land on which he wishes to claim the main residence exemption. This area does not exceed 2 hectares and is used primarily for private or domestic purposes in association with Alistair's dwelling. He sells the property for $500,000. He obtains an opinion from an expert valuer that the value of the 2 hectares of land and the house is $300,000. The cost base attributable to this part of the property (taking into account improvements since purchase) is $180,000 and the remainder is $120,000. The capital gain on the total property is $200,000. Alistair disregards $120,000 of the capital gain because it is attributable to his main residence.

Discount Method

In certain circumstances, a property owned by but adjacent to a main residence may be considered a separate CGT asset and as such, the disposal of the property will result in a CGT event A1 occurring. You will be entitled to a 50% discount on any capital gain made if:

· you are an individual;

· the CGT event happened after 11:45am (by legal time in the Australian Capital Territory) on 21 September 1999;

· the cost base has been calculated without reference to indexation at any time;

· the property was acquired by you at least 12 months before the CGT event.

In your case, you acquired the property after 20 September 1985 and have retained ownership of the property for more than 12 months. You will be entitled to a 50% discount on any capital gain made upon disposal of the 2 hectares of land that does not qualify for main residence exemption.

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