Edited version of private ruling

Authorisation Number: 1011732805674

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Ruling

Subject: Main residence - separate asset

Questions

1. Is the addition of a 'granny flat' to your main residence considered to be a separate asset under section 108-55 of the Income Tax Assessment Act 1997?

Answer: No.

2. Are you entitled to the full main residence exemption if you have rented out part of your home?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You and your partner purchased a property before 1980.

You and your partner lived in the property as your principal place of residence from the time of purchase.

The total land area of the property is less than 2 hectares.

In 1996/97 you and you partner spent $ on renovations to the property and added a second storey and 'granny flat'.

The 'granny flat' is part of the main house and shares common areas such as the laundry and passageway.

You estimate that the 'granny flat' makes up only 15% of the total renovations.

You and your partner rented out the 'granny flat' from 1997.

You and your partner have declared income and expenses relating to the 'granny flat'.

In 2010 you and your partner separated.

You will retain 100% of the property as part of the settlement - the transfer of your partner's share has not occurred.

You will continue to live in the property and rent out the 'granny flat'.

You are considering selling the property.

You and your partner have a Memorandum of Mediation in place through Relationships Australia. This agreement is not binding under state, territory or foreign law.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 112-45.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-190.

Income Tax Assessment Act 1997 Section 118-192.

Income Tax Assessment Act 1997 Subsection 126-5(1).

Income Tax Assessment Act 1997 Subsection 126-5(2).

Income Tax Assessment Act 1997 Subsection 126-5(3).

Income Tax Assessment Act 1997 Subsection 126-5(4).

Income Tax Assessment Act 1997 Subsection 126-5(5).

Income Tax Assessment Act 1997 Subsection 126-5(6).

Reasons for decision

Date of acquisition

In general, you are taken to acquire a CGT asset as a result of becoming its owner (section 109-5 of the ITAA 1997). An entity disposes of an asset to you when the disposal contract is entered into, or if there is no contract, when the actual change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

House and land as one asset

It is a general rule of real property law that anything attached to land becomes part of the land. However, an exception to this principle is set out in section 108-55 of the ITAA 1997. A building will be treated as a separate asset from the land to which it is affixed if the building is a depreciating asset for which a balancing adjustment must be worked out on sale, or the building is post-CGT asset and the land to which it is affixed is a pre-CGT (acquired before 20 September 1995) asset.

Other capital improvements to pre-CGT assets

If you make a capital improvement to a CGT asset you acquired before 20 September 1985, this improvement is treated as a separate asset and is subject to CGT if, at the time a CGT event happens to the original asset, the cost base of the capital improvement is more than:

· The improvement threshold for the year in which the event happens, and

· 5% of the amount of money and property you receive from the event.

The improvement threshold for the1996-97 income year is $88,227. You have advised that the 'granny flat' makes up only 15% of your total renovations totalling. Your cost base for the improvement is well below the threshold for the 1996-97 income year and as such the improvement is not considered a separate CGT asset.

Circumstances where you would be exempt from CGT:

If your home ceases to be your main residence, you may, under certain circumstances, choose to continue to treat it as your main residence. This will only apply if you are absent from your home.

If you elect to retain your home as your main residence while you are away and you are using it to produce assessable income, the maximum period that you can treat it as your main residence is six years.

If you do not use your home for income producing purposes and you have no other main residence, you can treat it as your main residence indefinitely.

As you will be occupying your home whilst renting out the lower level, you are not able to make this choice.

Marriage breakdown rollover relief

As a general rule, CGT applies to all changes of ownership of assets acquired on or after 20 September 1985. However, marriage breakdown rollover relief under Subdivision 126-A of the ITAA 1997 is potentially available when CGT event A1 happens involving asset transfers between spouses or former spouses.

Where an asset is transferred to a spouse as a result of a marriage breakdown, there is an automatic rollover for the transferring spouse in certain circumstances. The rollover will allow the transferor spouse to disregard a capital gain or capital loss that would otherwise arise as a result of the disposal of their interest in the asset. In effect, the spouse who receives the asset will make the capital gain or capital loss when they subsequently dispose of the asset.

From the 13 December 2006, marriage breakdown rollover relief under section 126-5 of the ITAA 1997 applies if CGT event A1 happens because of something done under a written agreement that is binding because of a state, territory or foreign law relating to de facto marriage breakdowns.

If the requirements of the section are satisfied, the rollover is automatic. There is no need for any election to be made, nor can parties to a marriage breakdown agree not to apply the provisions if the requirements have been satisfied.

Section 126-5(6) states that for a disposal case where the transferor acquired the asset before 20 September 1985, the transferee is taken to have acquired it before that day.

In your case, the current agreement is not binding. When your partner transfers 50% of the property to you as part of your settlement agreement, that part of the property (the half transferred from your spouse) is acquired on the date of transfer and is not a pre-CGT asset.

Proportion of your home exempt from CGT:

If you dispose of your home, the taxable portion of your capital gain will be based on the percentage of floor area you have set aside to produce income and the period that your home is used to produce income.

As you are renting out part of your home, a percentage of any capital gain or capital loss will be applicable on the disposal of your home.

Further issues for you to consider

We have ruled on the fact that your current Memorandum of Mediation is not binding under a state, territory or foreign law relating to de facto marriage breakdowns.

If your agreement is ratified in such a way that it is binding under a state, territory or foreign law relating to de facto marriage breakdowns then the part transferred to you would remain a pre-CGT asset.

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