Edited version of your private ruling

Authorisation Number: 1012458307143

Ruling

Subject: Capital Gains Tax: main residence where land exceeds two hectares

Question 1

Is your residence considered to be a 'dwelling' for the purposes of section 118- 115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes

Question 2

Will any gain on the disposal of your main residence be partially exempt from capital gains tax under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

01 July 2012

Relevant facts and circumstances

The following description of the scheme is based on information provided by the Taxpayer. The following documents, or relevant parts of them, together with any information provided by telephone, form part of and are to be read with the description:

Private ruling application form (not for tax professionals).

Scheme

You purchased the property in year X and it has been your sole residence since and has not been utilised for business purposes.

In year x you built the dwelling on the property, in which you have lived since as your main residence.

The land containing your residence is on an area greater than 2 hectares.

You are now in the process of selling the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-115

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 110-25

Issue 1

Summary

The building is considered to be a 'dwelling' for the purposes of section 118- 115 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Discussion of law

Meaning of dwelling, Section 118-115 of ITAA 1997 provides:

118-115(1) A dwelling includes:

(a) a unit of accommodation that:

(i) is a building or is contained in a building; and

(ii) consists wholly or mainly of residential accommodation; and

(b) a unit of accommodation that is a caravan, houseboat or other mobile home; and

(c) any land immediately under the unit of accommodation.

The Guide to Capital Gains Tax (CGT) 2011-12 (NAT 4151-6.2012) provides a dwelling is anything that is used wholly or mainly for residential accommodation. Certain mobile homes can also be dwelling. Examples of a dwelling are:

· A home or cottage

· An apartment or flat

· A strata title unit

· A unit in a retirement village

· A caravan, houseboat or other mobile home.

Application of the law to your circumstances

You purchased the property in year X and it has been your sole residence since.

In year X you built the residence on the property, in which you have lived since as your main residence, and has not been used it for any business purpose.

Conclusion

As a dwelling includes a building in accordance to section 118-115 of the ITAA 1997 and the building has been used as your sole residence since built in year X, it is considered a dwelling.

Question 2

Summary

As the dwelling was your main residence for your entire ownership period, and the requirements of section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) have been partially met, the gain on the disposal will be partially exempt from Capital Gains Tax.

Detailed reasoning

Section 118-110 of the ITAA 1997 states:

A capital gain or capital loss you make from a Capital Gains Tax (CGT) event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual, and

(b) the dwelling was your main residence throughout your ownership period; and

(c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

You make a capital gain or a capital loss as a result of a CGT event happening (section 102-20 of the (ITAA 1997)).

The most common event (CGT event A1) happens if you dispose of a CGT asset to someone else. In your situation, this will be the disposal of your dwelling (section 104-10 of the ITAA 1997).

You make a capital gain from a CGT event A1 if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those proceeds are less than the assets reduced cost base (subsection 104-10(4) of the ITAA 1997).

Main Residence Exemption

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence if:

· the dwelling was your home for the whole period you owned it;

· the property was not used to produce assessable income; and

· any land on which the dwelling is situated is not more than two hectares.

In your case we need to determine if the dwelling was your home from the time you acquired your interest in the land. We also need to consider the consequences if the land on which your dwelling is located is more than two hectares as you have advised the area of the land is over two hectares.

Building a dwelling on land you already own

If you build a dwelling on land you already own, the land does not start to qualify for the main residence exemption until the dwelling actually becomes your main residence. However, where you construct a dwelling on vacant land that you own, you can choose to treat the land as your main residence for up to four years before the dwelling becomes your main residence (section 118-150 of the ITAA 1997). You may only make this choice if you meet the following two conditions:

· the dwelling becomes your main residence as soon as practicable after its construction is finished, and

· it continues to be your main residence for a minimum of three months.

In your case you purchased the property in year X and it has been your sole residence since.

In year X you built the dwelling, in which you have lived since as your sole residence until you sell the property. You are now in the process of selling the property, and the property is currently under offer.

You owned the block of land for less than four years before the dwelling became your main residence.

Therefore you satisfy the conditions set out in section 118-150 of the ITAA 1997 and can treat the dwelling as your main residence from the time you acquired your interest in the land.

Land area greater than two hectares

Under section 118-120 of the ITAA 1997 the main residence exemption extends to a maximum of two hectares of land adjacent to the dwelling (including the area of the land on which the dwelling is built).

Taxation Determination (TD) 1999/68 indicates that the land does not have to be contiguous to (that is, touching or in contact with) the land on which a dwelling is situated to be 'adjacent' to the dwelling for the purposes of section 118-120 of the ITAA 1997.

In your case the total area of the block of land on which the dwelling is located is greater than two hectares. Any capital gain or capital loss attributable to the remaining land, in excess of 2 hectares, cannot be disregarded as it is not covered by the main residence exemption.

The remaining land, that you choose does not need to be connected to the land under the dwelling, it can be chosen from anywhere on your property so long as the land chosen is for private or domestic purposes.

Where a property exceeds 2 hectares, Taxation Determination (TD) 1999/67 (a copy has been enclosed for your reference) applies when calculating the capital gain or capital loss.

 TD 1999/67 states at paragraphs 3 to 5:

3. If your selected area of land can be separately valued, you can calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land.

4. If your selected area of land can not be separately valued, you calculate your capital gain or loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis.

5. The amount of the capital gain or loss attributable to the remainder of your land must be reasonable in the circumstances.

It is clear from paragraph 3 of TD 1999/67 that where the value of the selected area of land for the main residence exemption is greater or less than the remainder of the land and both areas are valued separately, the capital gain or capital loss is calculated by apportioning the capital proceeds and the cost base, or reduced cost base, on the basis of valuation. However, paragraph 5 of TD 1999/67 further provides that the amount attributable must be reasonable in the circumstances.

Cost base

There are five elements which a person can include in the cost base of the asset in working out their capital gain or loss (section 110-25 of the ITAA 1997).

The first element is the money paid or required to be paid for the asset. Hence, the purchase costs in acquiring your interest in the block of land can be included in the first element of the cost base.

The other four elements of the cost base are the incidental costs, non-capital costs, cost associated with increasing the value of your asset, and costs of preserving your asset. Some of the costs associated with the building your dwelling will be included in these elements.

The five elements are spelled out on pages 11-12 of the Guide to Capital Gains Tax 2011-12, a copy of which is enclosed for your reference (also available on the Tax Office website at www.ato.gov.au).

Conclusion

As the dwelling was your main residence for your entire ownership period you can disregard any capital gain or capital loss you have made upon its disposal. However, you will need to calculate whether a capital gain or capital loss has been made on that portion of the land greater than 2 hectares.

A capital gain must be included in your assessable income. A capital loss can be deducted against other capital gains in the current or futures years until it is fully used.