Edited version of your private ruling

Authorisation Number: 1012421638420

Ruling

Subject: Main residence exemption

Question

Will you be entitled to the main residence exemption for a dwelling and the surrounding Y hectares as provided in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You purchased a block of land with other parties.

The land was all on one title. Your name is on the title deed.

Your share of the land stipulated in the contract was a specific block of approximately Y hectares.

You established a residence on the property and lived there with your spouse for approximately Z years.

You recently moved and one of the other parties in the land has offered to buy your parcel.

The block is still on the one title.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 118-B

Reasons for decision

A taxpayer can only make a capital gain or capital loss if a capital gains tax (CGT) event happens. A CGT asset includes any kind of property. An interest in a CGT asset is also a CGT asset (section 108-5 of the ITAA 1997). When you dispose of your interest in a CGT asset through a change of ownership to another entity, CGT event A1 happens (section 104-10 of the ITAA 1997).

There are some circumstances where, even though a CGT event has occurred, a CGT liability does not arise due to an exemption or exception that applies to disregard any capital gain or capital loss that may arise from a CGT event (section 100-30 of the ITAA 1997). One of these is the main residence exemption in Subdivision 118-B of the ITAA 1997.

Main residence exemption

Section 118-110 of the ITAA 1997 outlines the basic conditions of the main residence exemption and reads in part as follows:

(1) A capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual; and

(b) the dwelling was your main residence throughout your ownership period; and

(c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. 

Section 118-120 of the ITAA 1997 states:

(1) This Subdivision applies to a dwelling's adjacent land (if the same CGT event happens to that land or your ownership interest in it) as if it were a dwelling.

(2) Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.

(3) The maximum area of adjacent land covered by the exemption for the CGT event (the current event) is 2 hectares, less the area of the land immediately under the *dwelling.

For the purposes of section 118-120 of the ITAA 1997, Taxation Determination TD 1999/67 states that where your land (including the land on which your dwelling is situated) exceeds two hectares, you can apply the main residence exemption in subdivision 118-B of the ITAA 1997 to whichever area of land you choose in addition to the land on which your dwelling is situated.

Where a taxpayer has land that 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.

It is clear from paragraph 3 of TD 1999/67 that where the value of the selected area of land for the main residence exemption is greater or less than the remainder of the land and both areas can be valued separately, the capital gain or capital loss is calculated by apportioning the capital proceeds and the cost base, or reduced cost base, on the basis of valuation. However, paragraph 5 of TD 1999/67 further provides that the amount attributable must be reasonable in circumstances.

A capital gain or capital loss you make from the surrounding land is only disregarded under the main residence exemption if it is used primarily for private or domestic purposes in association with your dwelling.

In your case you own a block of land which forms part of a larger portion of land held under one title. The fact that the total land is under one title does not preclude you from claiming the main residence for a portion of your block. You can choose to treat the dwelling as your main residence and up to two hectares of land adjacent to the dwelling.

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