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Ruling

Subject: Capital proceeds and the main residence exemption

Question 1

Does the additional payment represent part of the capital proceeds relating to the disposal of your property?

Answer

Yes

Question 2

Is a portion of the capital gain made on the disposal of your property exempt from capital gains tax (CGT) under the main residence exemption?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You jointly acquired a property. The property consisted of a residence and various sheds on more than 2 hectares of land.

The residence was your main residence from the acquisition date.

You also operated a business from the property.

A Government authority approved projects that impacted your land. You were informed of your right to request the acquisition of your property as a result of these projects and subsequently you submitted your request to the relevant entity.

That entity made on offer for the property which you accepted. The offer consisted of $X based on an independent valuation of the property plus an additional amount of $X being in consideration of:

§ The vendor's costs of obtaining legal and expert advice for the determining of the price of the property;

§ The vendor's relocation costs; and

§ Any disturbance caused by the land acquisition process.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 116-20(1)

Income Tax Assessment Act 1997 Section 118-110

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

Reasons for decision

Capital proceeds

Taxation Ruling TR 95/35 discusses the treatment of compensation receipts. If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset (CGT event A1). In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation (paragraph 4 TR 95/35).

The underlying asset is the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.

In your case you received an additional amount of compensation under a provision within the contract of sale for the property. The additional amount was paid with reference to the costs you incurred in relation to obtaining professional advice and relocating as well as for disturbance caused by the land acquisition process.

Using the 'look through approach' we consider that the 'right to seek compensation' leads directly from the disposal of your property. Accordingly, your property is the 'underlying asset' for CGT purposes. Therefore, the additional amount received under the contract is treated part of the total capital proceeds received for the disposal of the property in addition to the purchase price listed on the contract for sale.

Main residence exemption

Section 118-110 of the ITAA 1997 states that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period. However, subsection 118-120(2) specifies that the total of the land (including the land on which the dwelling is situated) must not exceed 2 hectares. Where the land exceeds 2 hectares, you will only be entitled to a partial exemption.

In your case, you disposed of the property that included your main residence. You satisfy the requirements to obtain the main residence exemption; however, the land exceeded 2 hectares. Accordingly, you are only entitled to a partial main residence exemption.

The capital gain you make, calculated with reference to the total capital proceeds you received, including the additional payment under the contract, will need to be reasonably apportioned between the non-exempt and the exempt portion of the property.