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Subject: Capital Gains Tax - Main residence - two dwellings on one title - disposal

Question 1:

On the sale of the land on one title with 2 dwellings will the capital gain made on the disposal of the property be disregarded in full?

Answer:

No.

Question 2:

On the sale of the land on one title but with two dwellings will the capital gain made on the disposal of the property be disregarded in part?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You purchased a property after 20 September 1985.

The land size is less than 2 Hectares.

You resided in a bungalow (Dwelling A) situated on this property for a period of time, you constructed a new dwelling (Dwelling B) and on completion you moved into that dwelling

You rented out dwelling A from this period onwards and have resided in dwelling B.

You will treat dwelling B as your main residence from the day you moved in.

You will sell the land and dwellings as a detached dual occupancy in one sale as the dwellings do not have separate titles

You will make a capital gain as a result of the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). 

CGT event A1 will happen when you dispose of the property (section 104-10 of the ITAA 1997). 

However, in certain circumstances, there may be an exemption or exception that can apply which means that the capital gain or capital loss created by the CGT event is disregarded. 

You make a capital gain if your capital proceeds are greater then your cost base. You will need to apportion the capital proceeds received for the sale of the land and dwellings between the land and dwellings.

Main residence exemption

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (section 118-110 of the ITAA 1997).  To obtain the full exemption: 

· the dwelling must have been your home for the whole period 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 two hectares or less.  

In your case, you cannot get the full exemption from CGT on the disposal of dwelling A because it was not your main residence after you moved into dwelling B. The capital gain made on dwelling B is also not disregarded as this dwelling was not your main residence for all of your ownership period (the period that dwelling A was your main residence).

Capital gain on Dwelling A

If you start using your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain. In working out the amount of capital gain, the period before the dwelling is first used to produce income is not taken into account.

You are taken to have acquired the dwelling at the time you first started using it for income producing purposes for its market value at that time if all of the following apply:

· you acquired the dwelling on or after 20 September 1985;

· you first used the dwelling to produce income after 20 August 1996;

· when a CGT event happens in relation to the dwelling, you would obtain only a part exemption because the dwelling was used to produce assessable income during the period you owned it; and

· you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income (section 118-192 of the ITAA 1997).

If all the above conditions are met, the first element of the cost base of the dwelling will be deemed to equal the market value on the day you first commenced renting the property.  As such, any CGT payable will be calculated on the difference between the proceeds you receive from the disposal of the property and the market value when you first commenced producing income from the property.

In your situation, all the conditions have been met. As such, the deemed acquisition time stated above overrides your actual acquisition time, entitling you to use the market value of the dwelling on the day you first commenced renting dwelling A as the first element of the cost base of that dwelling.

Capital gain on dwelling B

The CGT on the sale of dwelling B will be partially exempt as dwelling B was only your main residence for part of your ownership period.

As dwelling B is not a separate asset you are taken to have acquired your ownership interest in it when you acquired the original land with dwelling A on it. As dwelling B was not your main residence from this date you are only allowed a partial exemption on the disposal of dwelling B.

Capital gain on adjacent land

The CGT on the sale of the land adjacent to the dwellings will be exempt to the extent that that land was used primarily for private and domestic purposes.