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Edited version of your written advice
Authorisation Number: 1051298750843
Date of advice: 31 November 2017
Ruling
Subject: Subdivision of land-main residence exemption
Question 1
Are you eligible for the full main residence exemption from capital gain tax on the sale of the dwelling where you resided?
Answer 1
Yes
Question 2
Are you eligible for the full or partial main residence exemption from capital gain tax on the sale of the granny flat where your parents resided?
Answer 2
No
This ruling applies for the following period(s):
30 June 2018
30 June 2019
The scheme commences on
1 July 2017
Relevant facts and circumstances
You purchased a house and land package with your then spouse after 19 September 1985.
You and your spouse built a dwelling on the land.
The total land area of the land is less than two hectares.
As part of the settlement agreement following your relationship breakdown, your spouse’s interest in the dwelling is transferred to you (dwelling).
You agreed to build a granny flat to the rear of your dwelling with your parents to provide support to them (granny flat).
No formal agreement or financial contribution was entered into between you and your parents in relation to the granny flat arrangement.
Your parents paid for the construction costs of the granny flat which was built for $XX,000.
You and your parents investigated subdividing the land containing the dwelling and granny flat, but did not proceed with the subdivision process.
Council did treat both the dwelling and granny flat as two separate rateable properties and your parents paid the rates in respect to the granny flat.
The granny flat was your parent’s principal place of residence and the supply of gas, electricity and other services was separately metered from the dwelling and paid for by your parents.
Your parent passed away a number of years ago and your other parent continued to live in the granny flat until they passed away recently.
You intend to claim the main residence exemption in relation to the dwelling for the whole of your ownership period.
You would like to subdivide the land on which the dwelling and granny flat is located, and sell the dwelling and granny flat separately.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 108-5
Income Tax Assessment Act 1997 section 118-120
Income Tax Assessment Act 1997 section 118-165
Reasons for decision
Summary
The sale of your dwelling where you resided will be fully exempt from a capital gain tax (CGT) when it is sold, as it is considered to be your main residence. The granny flat (where your parents resided), is a separate asset from the land on which your dwelling is located and because it has not been occupied by you during your ownership period, will not be exempt from CGT.
Detailed reasoning
You make a capital gain or a capital loss as result of a CGT event happening to a CGT asset in which you have an ownership interest.
Buildings and land are specifically defined as CGT assets and the disposal of a CGT asset constitutes a CGT event A1.
Main residence exemption
As a general rule, you can disregard any capital gain or capital loss realised on the disposal of a dwelling if:
1. you are an individual;
2. the dwelling was your home for the whole period you owned it; and
3. the dwelling was not used to produce assessable income.
The exemption extends to land provided the following requirements are satisfied:
1. the land is adjacent to the land on which the dwelling is situated
2. (Land does not have to be contiguous to (that is, touching or in contact with) the land on which a dwelling is situated to be 'adjacent' to the dwelling);
3. the total area of land is not greater than 2 hectares;
4. the land is used primarily for private or domestic purposes in association with the dwelling; and
5. the land is not sold separately from the dwelling.
The main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it. If you dispose of adjacent land to the same person and at the same time as you dispose of your main residence, the exemption extends to the adjacent land.
Subdivision of land
Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title.
The acquisition date of the subdivided block will be your original purchase date. However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis.
Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis.
Application to your circumstances
As the dwelling has been treated as your main residence for the entire ownership period, you will qualify for a full main residence exemption in respect to the dwelling.
When the dwelling and granny flat is subdivided and sold separately from each other, the land adjacent to your dwelling (now a separate lot containing the granny flat) can no longer be treated as being used primarily for private or domestic purposes in association with your dwelling and therefore subject to the main residence exemption. The ownership period in which you owned the granny flat commenced a number of years ago when you originally acquired the land. As you have treated the dwelling as your main residence throughout your ownership period and you cannot have more than one main residence at any one time, you will not be entitled to a partial or full main residence exemption on the sale of the granny flat.
If the capital proceeds from the sale of the granny flat are more than the cost base, a capital gain is made. The cost base includes the cost of the original land apportioned on a reasonable basis between each subdivided block, the cost of constructing the granny flat and other costs associated with acquiring, holding and disposing of the granny flat.
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