Edited version of private ruling

Authorisation Number: 1011740751012

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Ruling

Subject: Capital Gains Tax exemption on the disposal of a main residence

Question

Does Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) determine the extent to which the main residence exemption will apply to a gain arising from the sale of a property that: exceeds 2 hectares; in which the taxpayers have a partial interest; on which their principal place of residence is located; and includes two sheds used for income producing purposes?

Answer

Yes.

Relevant facts

The taxpayers are one of three owners of a single undivided block of land (single title). The land is in excess of 2 hectares and has two dwellings and two sheds. The sheds are used for income producing purposes.

The dwelling occupied by the taxpayers was on the property when it was purchased.

The dwelling has not been used for income producing purposes during the ownership period.

The taxpayers have not and do not intend to claim the main residence exemption in association with any other residence during the ownership period.

A small storage shed was built on the land after it was purchased and has always been used for income producing purposes, since that time.

A main shed was also built on the land after it was purchased and has always been used for income producing purposes, since that time.

Each of the three co-owners has one-third equity (as tenants in common) in the property.

The taxpayer's reside in one of the dwellings and one of the other co-owners resides in the other dwelling.

The third co-owners do not occupy any of the dwellings and are described as non-occupants.

The land surrounding the main residence, with the exception of the shed and land on which the second residence is located, has always been used for private or domestic purposes in association with the residence occupied by the taxpayers.

Summary

Subdivision 118-B of the ITAA 1997 determines the extent to which the main residence exemption will apply to a gain arising from the sale of a property that exceeds 2 hectares, the taxpayers have a partial interest in, on which their principal place of residence is located and includes two sheds used for income producing purposes.

The taxpayers would be entitled to the main residence exemption in respect of their interest or one-third share in their dwelling and any surrounding area up to the maximum of 2 hectares, provided the land is used primarily for private or domestic purposes in association with their dwelling.

There is no main residence exemption on their share of the capital gain that relates to the other dwelling and the sheds (as they were used for income producing purposes), any land not used primarily for private or domestic purposes in association with their dwelling (including the land on which the sheds and other dwellings are situated) and any excess area of land over the maximum of 2 hectares.

Detailed reasoning

The main residence exemption provisions are now in Subdivision 118-B of the ITAA 1997. This replaced part of section 160ZZQ, (specifically subsection 160ZZQ(12)), in Division 18 of Part IIIA of the ITAA 1936.

The words 'principal residence' in the ITAA 1936 have been replaced with the words 'main residence' in the ITAA 1997.

The taxpayers are entitled to claim the main residence exemption in respect of their one-third ownership interest in their dwelling, as they occupied the dwelling during their ownership period and satisfy all the requirements.

However, the main residence exemption will only apply to part of their share of the capital gain (if any) made from the disposal of the property.

For the taxpayers and occupants of the dwelling and land that is the subject to this ruling; that part of the proceeds which relates or is reasonably attributable to the other dwelling, that is, the dwelling they do not occupy, the area of land exceeding 2 hectares and the area of land on which the two sheds are located will not be exempt for the reasons outlined below.

Land area maximum of 2 hectares

The main residence exemption is available in respect of any adjacent land up to a maximum land area of two hectares including the area of land on which the dwelling is situated (subsection 118-120(2) of the ITAA 1997).

Any capital gain attributed to the excess over the two hectares maximum area will be subject to capital gains tax. Any capital gain (if any) made on the disposal of the whole property will have to be prorated or apportioned for the excess area of land. As the land exceeds two hectares, the taxpayers may choose which area will be included within the two hectares as per Taxation Determination TD 1999/67.

Two dwellings on one block of land (single title)

There are two dwellings which are used as main residences and only one of them is occupied and used by the taxpayers.

'Dwelling', defined in section 118-115 of the ITAA 1997 as a unit of accommodation etc., includes any land under the unit of accommodation but a dwelling can also include more than one unit of accommodation provided the units of accommodation are used together as one place of residence which will be a question of fact.

The taxpayers who live in one dwelling are not entitled to an exemption in relation to the second dwelling as it is occupied and used by one of the other co-owners.

As the estate is being sold as a whole (under one title) the taxpayers will only be entitled to an exemption for the dwelling they occupy and any surrounding land, used primarily for private or domestic purposes in association with their dwelling, up to a maximum of 2 hectares.

The sheds which are used for income producing purposes

If a dwelling consists of a flat or home unit, the main residence exemption applies to a garage, storeroom or other structure (including a shed) that is associated with it as if it were a dwelling.

The sheds could also form part of the dwelling because they are associated with the residential accommodation and any exemption could apply to them by way of an extension of the main residence exemption to the adjacent land represented by the shed (subsection 118-120(3) of the ITAA 1997).

The main residence exemption in relation to the sheds is only available to the extent that the shed is used for private or domestic purposes in association with the dwelling and if it is disposed of (or the same CGT event happens to the shed and the dwelling) together with the rest of the property.

Although the sheds will be disposed of together with the rest of the property, the exemption will not apply in relation to the sheds as they were used for income producing purposes at the time the CGT event happened. The sheds would fail the requirement in subsection 118-120(3) of the ITAA 1997 that they be used primarily for private or domestic purposes in association with the flat or home unit. Taxation Determination TD 92/115 (withdrawn) provides examples of how to apportion any capital gain between the sheds and the rest of the property.

However, it should be pointed out that TD 92/115 was withdrawn on 12 April 2000 and replaced with TD 2000/15. The effect of the new TD is that as the land on which the sheds were located was used for income producing purposes during only part of the ownership period (but used for private or domestic purposes in association with the residence prior to their construction) therefore the taxpayers are entitled to apportion any capital gain attributable to the land on which the sheds are located to take into account the extent of its private and domestic use.

What needs to be considered is the use of the land over the whole ownership period.

Conclusion

The taxpayers would be entitled to the main residence exemption in respect of their interest or their respective one-third share in their dwelling and any surrounding area up to the maximum of 2 hectares.

However, they will be liable to tax on their share of the capital gain that relates to the other dwelling, the excess area of land over 2 hectares and the area of land on which the sheds are situated.

The land on which the sheds are located will be partially exempt from capital gains tax, to the extent that the land was used primarily for private or domestic purposes in association with the dwelling, prior to the sheds construction.