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Ruling
Subject: Capital gains tax - main residence
Question 1
Are you entitled to the main residence exemption on the sale of your dwelling and adjacent land up to two hectares in size?
Answer
Yes.
Question 2
Will you be liable to capital gains tax on the area of land exceeding two hectares?
Answer
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
You and your partner own a property.
You and your partner purchased this property some time after 20 September 1985.
The size of the property is over 2 hectares.
The property has always been the main residence of you and your partner.
You and your partner have decided to offer the property for sale.
The property consists of land and residence on one title.
The land has been rezoned to allow subdivision into two titles.
You and your partner have decided not to subdivide the property.
The property has never been used to produce income.
You and your partner have never claimed any deductions on the property.
You and your partner have never been in the business of land development.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 104-10
Income Tax Assessment Act 1997 - Section 118-110
Income Tax Assessment Act 1997 - Section 118-120
Reasons for decision
Capital gains tax (CGT)
You make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.
CGT assets include real estate acquired on or after 20 September 1985.
You are deemed to have disposed of a CGT asset if a change in ownership occurs. The time of the event is when you enter into a contract for the disposal of the CGT asset; or, if there is no contract, when a change of ownership occurs.
Any net capital gain resulting from a CGT event is included in your assessable income and you are taxed on the net capital gain at your marginal tax rate.
For income tax purposes, joint owners of CGT assets split any capital gain or loss between them according to their interest in the asset.
Main residence exemption
Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence.
To be eligible for the full exemption:
§ the dwelling must have been your home for the whole time you owned it,
§ you must not have used the dwelling to produce assessable income, and
§ any land on which the dwelling is situated must be 2 hectares or less.
Main residence on land of more than 2 hectares
The main residence exemption only extends to the dwelling plus two hectares of adjacent land. Any land that exceeds two hectares will therefore be subject to capital gains tax provisions.
If the land area surrounding a dwelling that is your main residence is greater than 2 hectares, you may choose which particular part of the land is covered by the main residence exemption.
If the area of land you select can be separately valued, you calculate your capital gain or loss on the remainder of the land by apportioning the capital proceeds and the cost base on the basis of the valuation.
If the area of land you select cannot be separately valued, you may calculate your capital gain or loss on the remainder of the land by apportioning the capital proceeds and the cost base on an area basis.
In this case you and your partner own a dwelling and adjacent land that is over 2 hectares in size. The dwelling has been the main residence of you and your partner since you purchased it. The dwelling has never been used to produce income. You will therefore be entitled to the main residence exemption on your dwelling and adjacent land of 2 hectares. The remaining hectares of land will not be subject to the main residence exemption and normal capital gains tax provisions will apply.