Edited version of private ruling

Authorisation Number: 1011672169635

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Ruling

Question One

Are the two dwellings on your property considered to be separate residences?

Yes.

Question Two

Is any capital gain or capital loss made on the sale of Dwelling A disregarded?

No.

Question Three

Is any capital gain or capital loss made on the sale of Dwelling B disregarded?

No.

This ruling applies for the following period

Income Year ended 30 June 2015

The scheme commenced on:

1 July 2010

Relevant facts

You and your spouse purchased your property after 20 September 1985.

The property is less than two hectares in size.

You occupied a cottage on the property (Dwelling A) as your main residence.

You constructed a new house on the property (Dwelling B).

You moved into Dwelling B as soon as practicable and it has been used as your main residence. You continued to use Dwelling A for private purposes as a games room and for storage. You will not make a choice to treat any period prior to moving into dwelling B as main residence days.

You have not made an absence choice with respect to Dwelling A.

Dwelling A is to be rented out and will produce assessable income. The rental arrangement does not provide for any exclusive use of the land on the property.

There is only one title for the property.

You do not intend to rent out dwelling A for more than five years.

You will then look to sell the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-115(1).

Income Tax Assessment Act 1997 Subsection 118-120(1).

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

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Subsection 118-145(1).

Income Tax Assessment Act 1997 Subsection 118-145(3).

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-185.

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Subsection 118-150(5)

Reasons for decision

Is the two dwellings on your property considered to be separate residences?

The first question is whether the two dwellings should be considered separately or as part of a single residence. In accordance with Taxation Determination TD 1999/69, the answer depends on the consideration of a number of factors. 

We consider the dwellings in your case to be two separate dwellings or two separate residences rather than part of a single residence. Factors taken into account in reaching this conclusion include:

· the dwellings are not connected in any way 

· each dwelling is completely self-contained- you are able to rent out Dwelling A whilst still living in Dwelling B.  

· you only lived in one of the dwellings at any given time. Although you used Dwelling A for private purposes for the period after you moved into Dwelling B and before you rented out Dwelling A, we consider that the function of Dwelling A in this period was superfluous to living requirements.

Choices available

In your case there are two dwellings, each of which was your actual main residence for a period, therefore there are a number of choices you could make. You can make whichever one gives you the best outcome.

You can choose to continue to treat a dwelling as your main residence even though it has ceased to be your main residence. However, you cannot treat another dwelling as your main residence during this period.

In this situation you have not elected to continue treating Dwelling A as your main residence after you moved into Dwelling B.

You can also choose to extend the main residence exemption for a dwelling to include the shorter period of four years before the dwelling becomes your main residence, or the period starting from when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence when you build, repair or renovate a dwelling on land in which you already own.

However, you can make this choice only if the dwelling:

· becomes your residence as soon as practicable after the dwelling is built, repaired or renovated, and

· continues to be your residence for at least three months..

In this case, any exemption available to you would include the four year period immediately before the date that Dwelling B becomes your main residence. Please note that if this choice is made, you cannot treat Dwelling A as your main residence for this period as you can only have one main residence at one time.

However, for the purposes of this ruling you have not made this choice.

Applying the basic rules

A capital gain or capital loss made on a dwelling that was your main residence for all of your ownership period is disregarded. Given the choices made neither Dwelling A or B has been your main residence for all the period that you have owned the property and the capital gain or capital loss made on their disposal will not be disregarded.

A capital gain or loss made on the sale of a dwelling that was your main residence is exempt for that part of its ownership period when it was your main residence. Generally the ownership period for a dwelling commences on the day the purchase contract is settled and ends on the day the sale contract is settled.

As each dwelling has been your main residence for part of your ownership period you are entitled to a partial exemption.

You calculate your capital gain or capital loss for each residence using the formula:

Capital gain or capital loss multiplied by the number of non-main residence days divided by total days of ownership interest.

The number of non-main residence days for each property is as follows

Dwelling A: From when you moved into dwelling B to the end of your ownership period.

Dwelling B: From the start of ownership period to when you moved into dwelling B.

Your ownership period is the number of days from the settlement of the contract of purchase to the settlement of the contract of sale.

The main residence exemption also applies to land adjacent to your main residence to the extent the land is primarily used for private or domestic purposes in association with the dwelling. You will need to determine the proportion of the land used in association with each of the dwellings.

You have two dwellings but you are only entitled to claim an exemption for one of them for any particular period. Generally, the exemption applies to the dwelling actually used as your main residence (plus adjacent land).

If each residence and land used in association with each dwelling can be separately valued, you calculate your capital gain or capital loss by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. 

If the residences cannot be separately valued, your capital gain or loss may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on a reasonable basis.