Edited version of private advice

Authorisation Number: 1051795330212

Date of advice: 8 February 2021

Ruling

Subject: CGT - main residence exemption

Question 1

Will the Commissioner exercise his discretion under paragraph 118-150(4)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow a longer period for the main residence dwelling to be constructed?

Answer

Yes.

Question 2

Does a full main residence exemption apply to the sale of the property?

Answer

No.

Question 3

Does a partial main residence exemption apply to the sale of the property?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased acquired vacant land in 19XX as a joint tenant with their late spouse.

A dwelling constructed on the land was completed in 19XX. The owners immediately moved in, with the dwelling continuing as their main residence from that time.

Several years later the deceased's spouse passed away.

The deceased now had two ownership interests in the property. The original interest that was acquired in19XX and the interest that was acquired as joint tenant upon the passing of their spouse.

The deceased continued to reside in the property as their main residence after the passing of the spouse.

The deceased moved into nursing home care in 20XX.

Despite being in a nursing home, the property was maintained and kept available for the deceased regular visits and remained their choice of main residence.

The property was never rented out or made available for rent or used for any other income-producing purpose.

In 20XX, a contract for sale was entered into in respect to the sale of the property.

The settlement for the property occurred 20XX.

The deceased passed away 20XX.

Relevant legislative provisions

Section 118-110 of the Income Tax Assessment Act 1997

Section 118-115 of the Income Tax Assessment Act 1997

Section 118-120 of the Income Tax Assessment Act 1997

Section 118-145 of the Income Tax Assessment Act 1997

Section 118-150 of the Income Tax Assessment Act 1997

Section 118-195 of the Income Tax Assessment Act 1997

Section 118-197 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Taxpayers can choose to apply the main residence exemption to land they own for a period of up to four years if they build a dwelling on the land and once constructed it becomes their main residence and continuous to be so for a period of at least three months (section 118-150 of the ITAA 1997). The Commissioner has a discretion to extend the 4-year period (paragraph 118-150(4)(a) of the ITAA 1997).

In this case, the owners chose to treat the land on which they built the dwelling as their main residence from the time they acquired their ownership interest. This had the effect of extending the main residence exemption to the period prior to the completion of the dwelling. The Commissioner has allowed more time for this choice to operate, as the period from when the land was purchased until the owners moved in, may have been slightly more than four years.

Question 2

Adjacent land

The main residence exemption is also available for a dwelling's adjacent land. A dwelling's adjacent land is land adjacent to a dwelling to the extent that the land was used primarily for private or domestic purposes in association with the dwelling (section 118-120 of the ITAA 1997). The maximum area of adjacent land covered by the exemption is two hectares less the area of land immediately under the dwelling (subsection 118-120(3) of the ITAA 1997).

The meaning of a dwelling includes any land immediately under the dwelling (section 118-115 of the ITAA 1997). Consequently, as the land area under the dwelling is considered part of the dwelling, it is subtracted from the 2 hectares covered in the adjacent land definition. This has the effect that the maximum total land area covered by the main residence exemption is limited to 2 hectares or 20,000 m2.

In this case the total land area included in the property sale was 20,230 m2. The 230 m2 of land in excess of the adjacent land exemption, is therefore subject to capital gains tax consequences.

Question 3

Summary

The main residence exemption applies to the portion of the property sale attributable to the dwelling and 20,000 m2 of the total land area. The capital gain arising from this portion of the property sale can be disregarded.

Detailed reasoning

Basic case

A capital gain or loss from a dwelling is disregarded if the taxpayer is an individual, the dwelling was their main residence throughout the ownership period and the interest did not pass to them as a beneficiary in, or as the trustee of, the estate of a deceased person (section 118-110 of the ITAA 1997).

The main residence exemption is applicable in this case, as the sale of the property was a CGT event in relation to a CGT asset that was the individual taxpayer's main residence dwelling during their ownership period.

For CGT purposes, the deceased held two separate ownership interests, at the time of the property sale. The 50% interest acquired with the original property purchase, and the remaining interest in the property acquired as joint tenant upon the passing of deceased spouse. For tax purposes the respective ownership interest's need to be considered separately.

Absence

If a dwelling that was a taxpayer's main residence stops being the taxpayer's main residence, the taxpayer may choose to continue to treat it as their main residence (subsection 118-145(1) of the ITAA 1997). If the dwelling is not used for income-producing purposes during the taxpayer's absence this choice can apply indefinitely (subsection 118-145(3) of the ITAA 1197).

As the Property was not used for any income producing purposes, the deceased was able to continue to treat it as their main residence for the purpose of the main residence exemption after moving into the nursing home in 20XX. The absence rule will apply to both ownership interests held by the deceased.

The 50% ownership interest acquired as joint tenant

A capital gain or loss from a CGT event that happens in relation to a dwelling is disregarded if the taxpayer is an individual and the interest passed to the taxpayer as a beneficiary in a deceased estate, and the following conditions provided by subsection 118-195(1) of the ITAA 1997 are satisfied:

1.    either:

a)    the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before death and was not then being used for incomes-producing purposes, or

b)    the deceased acquired the ownership interest before 20 September 1985, and

2.    either:

a)    the ownership interest ends within 2 years of the deceased's death, or within such longer period allowed by the Commissioner, or

b)    the dwelling was, from the deceased's death until the taxpayer's ownership interest ends, the main residence of one or more of the following persons:

                                                          i.    the spouse of the deceased immediately before the death

                                                         ii.    an individual who had a right to occupy the dwelling under the deceased's will, or

                                                        iii.    if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual (s 118-195(1) of the ITAA 1997).

Also, a taxpayer who acquires a dwelling as a surviving joint tenant is treated as acquiring the dwelling as a beneficiary of a deceased estate (section 118-197 of the ITAA 1997).

For the ownership interest acquired by the deceased as joint tenant upon the passing of the spouse, the requirements of subsection 118-195(1) of the ITAA 1997 are satisfied. The property was purchased after 20 September 1985, it was the deceased's main residence just before death and was not then being used for income-producing purposes. From the time of the spouse passed away, the dwelling remained the main residence of the deceased. The main residence exemption continued to apply to the ownership interest held by the deceased after the spouse passed away.

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