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Authorisation Number: 1011645720157

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Ruling

Subject: Capital gains tax (CGT): (Main residence exemption and adjacent land)

1. Is CGT applicable on the sale of your ownership interest in the property?

Yes.

2. Are you eligible to apply the main residence exemption to your ownership interest in the dwelling?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You and your family members purchased a property in which you own a one quarter share. The property only has one title, in the name of the five owners.

The property is over 20 hectares in size.

There are four mortgages on the property, with each of the mortgages in the name of the five owners of the property. You are a principal on two of the mortgages.

There are currently two separate houses on the property separated by one hundred meters.

You initially moved onto the property and lived in a caravan while the house (dwelling 1) that you are part owner off was being built.

After construction of dwelling 1 was completed you moved into the house, where you have resided ever since. The house is your principal residence.

You own one third of dwelling 1.

Later a second house (dwelling 2) was built on the property. This is owned by and is the principle residence of another family member and their family.

The property has not been used to produce income for any of the owners since it was purchased.

If the property is sold it will be as a single allotment (that is, the property and the two dwellings together), as you are legally prevented from subdividing the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-55

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Subsection 118-120(2)

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Subsection 118-150(4).

Reasons for decision

Capital gains tax

A capital gain or loss may arise when a CGT event happens to a CGT asset. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

The disposal of a CGT asset is a CGT event under section 104-10 of the ITAA 1997. You dispose of an asset when a change of ownership interest occurs from you to another entity. The time of the event is when you enter the contract of sale, or if there is no contract, when the change of ownership occurs

Co-ownership

Individuals who hold an asset as tenants in common (that is, are a co-owner of an asset) make a capital gain or capital loss from a CGT event in line with their interest in the asset. Therefore, a capital gain or loss made on the disposal of a CGT asset is split between the individuals according to their legal interest in the asset. Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset as a tenant in common.

Calculating a capital gain or loss

You make a capital gain if the capital proceeds from the disposal of the asset are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Capital proceeds

The capital proceeds of a CGT event are defined in section 116-20 of the ITAA 1997 as being the money received, or entitled to be received, in respect of the event happening, or the market value of any property received in respect of the event happening.

Where a CGT asset is sold and different entities have ownership interests in different parts of the asset, you will need to apportion the capital proceeds received for the sale of the entire asset between the different parts based on their market value.

Law Administration Practice Statement PS LA 2005/8 - Market Valuations provides that where there is a requirement to work out a market value in relation to any of the laws administered by the Commissioner of Taxation then the market valuations guidelines in Part C4 of the Consolidation reference Manual (Part C4) generally apply. The guidelines (at C4-1, pg 35) provide that a market valuation may be undertaken by:

· a qualified valuer, or

· a person without formal valuation qualifications, but who still bases their calculation on reasonably objective and supportable data, referred to as the 'do it yourself' approach.

Cost base

The cost base of a CGT asset is defined in section 110-25 of the ITAA 1997 and consists of the following five elements:

· money paid in respect of acquiring the asset, including the actual amount that you paid for the acquisition of the land

· incidental costs incurred in acquiring the asset, including legal and estate agent fees, costs of transfer, stamp duty, advertising or marketing fees and borrowing expenses

· non-capital costs of ownership of the CGT asset, including rates, land taxes, repairs and insurance premiums

· capital costs incurred to increase the asset's value, including costs incurred in applying for zoning changes, and

· capital costs incurred to establish, preserve or defend your title to the asset.

When a CGT event happens to a CGT asset and you haven't made a capital gain, you need to calculate the asset's reduced cost base to work out whether you have made a capital loss. The reduced cost base of a CGT asset has the same five elements as above, except for the third element where the costs of owning the asset are replaced by a balancing adjustment. The balancing adjustment relates to depreciating assets as per below:

Balancing adjustment amount - any amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available - this is only relevant for depreciating assets that have at some time been used for a non-taxable purpose.

The reduced cost base does not include indexation of the elements or any costs that you have incurred for which you have claimed a deduction or have omitted to claim.

The discount method

Capital gains may receive a more concessional tax treatment than other income after the introduction of the CGT discount in September 1999. The CGT discount means that individuals pay tax on only 50% of any capital gain they make on assets owned for at least 12 months.

You can use the discount method to calculate a capital gain if:

· a CGT event happens to an asset you own

· the CGT event happens after 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose to use the indexation method.

Main residence exemption

Generally, you can disregard a capital gain that you make on the sale of a dwelling that is your main residence for your entire ownership period.

To be eligible for the full main residence exemption:

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

· you must not have used the dwelling to produce income, and

· any land on which the dwelling is situated must be two hectares or less.

Whether a dwelling is a taxpayer's principal place of residence is an issue which depends on the facts in each case. Some relevant factors in determining whether a dwelling is your main residence may include, but are not limited to:

· the length of time the taxpayer has lived in the dwelling

· the place of residence of the taxpayer's family

· whether the taxpayer has moved his or her belongings into the dwelling

· the address to which the taxpayer has his or her mail delivered

· the taxpayer's address on the electoral role

· the connection of services such as telephone, gas and electricity, and

· the taxpayer's intention to occupy the dwelling.

The relevance and weight to be given to each of these or other factors will depend on the circumstances of each particular case.

Under section 118-120 of the ITAA 1997 the land adjacent to a dwelling is also exempt if:

· during the period you owned it, the land is used mainly for private and domestic purposes in association with the dwelling, and

· the total area of the land around the dwelling, including the land on which it stands, is not greater than two hectares.

Taxation Determination TD 1999/67 provides that where your land (including the land on which your dwelling is situated) exceeds two hectares, you can apply the main residence exemption to whichever area of land you choose (if it is used primarily for private or domestic purposes in association with your dwelling) in addition to the land on which your dwelling is situated. However, subsection 118-120(2) of the ITAA 1997 specifies that the total land, including the land on which the dwelling is situated, must not exceed two hectares.

Generally, if you build a dwelling on land that you already own, the land does not qualify for the main residence exemption until the dwelling becomes your main residence. However, under section 118-150 of the ITAA 1997 you can choose to have this exemption apply if you acquire an ownership interest in land and you:

· build a dwelling on the land

· move into the dwelling as soon as practicable after it is finished, and

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

Under subsection 118-150(4) of the ITAA 1997 the land, including the dwelling that is being built, is exempt for the shorter of the following periods:

· the four year period immediately before the dwelling becomes your main residence, or

· the period between the date you acquired the land and the date the dwelling becomes your main residence.

If you make this choice, you cannot generally treat any other dwelling as your main residence for the period.

Applying the law to your circumstances

You will make a capital gain or loss upon the sale of the property according to your legal interest in the property. You have a one quarter share in the land on which the dwellings are situated, and a one third interest in dwelling 1. You have no ownership interest in dwelling 2.

As you have a different legal interest in the dwelling and the land, these assets must be considered separately.

The joint owners of the property will need to apportion the capital proceeds received for the sale of the entire property between the land and the two dwellings based on their market value in order to determine the capital proceeds received for each asset. Market valuations may be undertaken by:

· a qualified valuer, or

· a person without formal valuation qualifications, but who still bases their calculation on reasonably objective and supportable data.

Dwelling 1

As you have a one third interest in dwelling 1, a third of the capital gain or loss made on the sale of this dwelling will be attributable to you.

However, any capital gain that you make on your ownership interest in the dwelling will be eligible for the main residence exemption as you:

· acquired an ownership interest in the land

· built a dwelling on the land

· moved into the dwelling as soon as practicable after it was finished being built

· continued to use the dwelling as your main residence for at least three months after it became your main residence, and

· have not used the dwelling to produce assessable income.

In addition, as the land adjacent to the dwelling was only used for private and domestic purposes, you are also able to apply the main residence exemption to a maximum of two hectares of land adjoining the dwelling.

Therefore, you can choose to treat your ownership interest in up to two hectares of land adjacent the dwelling, as part of your main residence for the four year period immediately before the dwelling became your main residence.

If you make this choice, you cannot treat any other dwelling as your main residence during this period.

Dwelling 2

As you have no legal interest in dwelling 2, you will not have any CGT consequences on the proportion attributable to the sale of this dwelling.

Land

Your capital proceeds on the sale of the land will be one quarter of the proceeds attributed to the land.

You may choose to make an adjustment to account for the time in which your interest in the two hectares of land adjacent to dwelling 1 was eligible for the main residence exemption.

If the capital proceeds attributable to you from the sale of the land are more than your cost base for the land then you will make a capital gain. Alternatively, if those capital proceeds are less than the land's reduced cost base then you will make a capital loss.

However, if you make a capital gain on the sale of the land, you can choose to apply the 50% discount method to reduce the amount of CGT included in your assessable income.

Capital gain or loss

Any capital gain that you make will need to be included in the calculation of your net capital gain in the year that the contract for the sale of the property is entered into. Your net capital gain is included in your assessable income and taxed at your marginal tax rate. Your net capital gain is:

your total capital gains for the year

minus

your total capital losses for the year and unapplied net capital losses from earlier income years

minus

any CGT discount to which you are entitled.

If you make a capital loss and your total capital losses for the income year are more than your capital gains, the difference is your net capital loss for the year. It can be carried forward to later income years to be deducted from future capital gains. You cannot deduct capital losses or a net capital loss directly from your other income.