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Ruling

Subject: CGT main residence

Questions and answers

1. Will the addition of another dwelling to your main residence create a CGT event when there is no change to the title?

No

2. Will the subdivision of your main residence create a CGT event if you gift or sell the new subdivision?

Yes

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased a property 18 January 1988

The property has been your main residence since you purchased it.

You are building another living unit on you dwelling (similar to a granny flat)

One of your children will move into the new dwelling

You are considering subdividing your property in order to give the new subdivision to your child so they could live in the new subdivision

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 104-10

Section 112-25

Section 118-110

Section 118-115

Section 118-120

Reasons for decision

A taxpayer will make a capital gain or loss if a CGT event happens. Where a CGT event involves a contract, the time of the event is usually when the contract is executed.

CGT event A1

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) defines CGT event A1 as the disposal of an asset.

CGT event A1 occurs when a disposal contract is entered into or, if there is none, it is when you stop being asset's owner. In the instance of transferring or selling a subdivision to a family member, CGT event A1 will occur when you are no longer the owner of that portion of land.

Where a family member merely occupies a dwelling on your property with no equitable interest in the land, no CGT event occurs as no ownership contract is entered into.

Subdivisions

If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax (CGT) purposes, the original land parcel is divided into two or more separate assets. Subdividing your land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original parcel of land is divided between the subdivided block on a reasonable basis.

Where there is a subdivision of land and there is no change in the ownership of the land, no CGT event occurs (section 112-25(2) of the ITAA1997).

Main residence exemption

Section 118-110 of the ITAA 1997 contains the basic CGT exemption for capital gains or losses made from a CGT event involving a taxpayer's main residence.

The section provides that capital gains or capital losses made from a CGT event relating to a CGT asset that is a dwelling or the taxpayer's "ownership interest" in it must be disregarded if certain conditions are satisfied.

The conditions which must be satisfied for the exemption to apply are:

· the taxpayer is an individual;

· the dwelling was the main residence of the taxpayer throughout the ownership period;

· the interest did not pass to the taxpayer as a beneficiary or the trustee of the estate of a deceased person; and

· the capital gain or loss arises out of a specified CGT events (In your circumstances CGT event A1)

For the purpose of the main residence exemption, a dwelling includes a unit of accommodation that is a building, or is contained in a building, and consists wholly or mainly of residential accommodation, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation (section 118-115 of the ITAA 1997). A dwelling can include more than one unit of accommodation, provided those units are used together as one place of residence or abode (Taxation Determination TD 1999/69).

Main residence and subdivisions

Where you own a block of land and subdivide it into two or more separate blocks, this can affect the amount of CGT that is assessable.

The main residence exemption applies to an adjacent structure of a flat or home unit (if the same CGT event happens to that structure or the taxpayer's ownership interest in it) as if it were a part of the dwelling (section 118-120(5) of the ITAA 1997). For a flat or home unit, a dwelling also includes a garage, storeroom or other structure that is associated with the dwelling (section 118-120(6) of the ITAA 1997).

Where an independent dwelling is established on your adjacent subdivision, the adjacent subdivision does not have an associated structure of the main residence dwelling and is therefore not covered by the main residence exemption.