Edited version of your private ruling

Authorisation Number: 1012600477709

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Ruling

Subject: CGT Main Residence Exemption

Question 1

Can you elect to have a separate main residence to your spouse being a farm property?

Answer

Yes

Question 2

If you make the above election will you be entitled to the full main residence exemption in relation to the farm property?

Answer

No

Question 3

If you make the above election, will you be entitled to a full or part main residence exemption on any capital gain you make upon the sale of your share of the family home?

Answer

No

Question 4

If you make the above election will only 2 hectares of the farm be subject to your partial main residence exemption?

Answer

Yes

This ruling applies for the following period(s)

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You acquired ownership of small farm (XX hectares) in 19XX. You are the sole owner of this property and have lived in the property since you acquired ownership.

You subsequently married and had children. You and your spouse jointly purchased a family home in equal shares. Your spouse and children live at the family home during the week for schooling purposes and you state that it is clearly your spouse's primary place of residence.

You however, live at three different properties, a work property in a capital city where you stay when required to by your employment duties, the family home where your family primarily lives and the farm property. You provided that over any given month you spend the majority of your time at the farm property and consider it to be your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 103-25

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 118-170

Income Tax Assessment Act 1997 Section 118-200

Reasons for decision

Summary

In your circumstances you can make an election to have a separate main residence to your wife, being the farm property. This election is made when you lodge your tax return for the year in which either of the properties are sold. However the consequence of this election would be that the main residence exemption would be split across both properties.

If you make an election to treat the farm as your main residence you will be not be able to claim the main residence exemption for the sale of your 50% share of the family home and will make a capital gain subject to any other discount or exemption.

Further if you make the above election you will only be entitled to a partial main residence exemption for the farm property. As your ownership share is greater than 50%, you will only be entitled to a main residence exemption for half the period from when you acquired the family home until when you sell either the family home or the farm property.

As the farm property is larger than the 2 hectares allowable under subsection 118-120 (3) of the ITAA 1997, only the 2 hectares of the land you choose (which includes the land immediately under the dwelling) will be subject to your partial main residence exemption.

CGT and the main residence exemption

Capital gains tax (CGT) is the tax you pay on certain gains that you make. The most common CGT event is A1. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines CGT event A1, disposal of a CGT asset, which covers the sale of assets such as property and land.

There are however exemptions which can result in any capital gain or loss made due to the disposal of a CGT asset being disregarded. Section 118-110 of ITAA 1997 states that any gain or loss made on the disposal of your main residence is disregarded as long as the property was your home for the entire period of ownership; was not used to produce assessable income; and is situated on two hectares or less.

Main residence exemption and spouses

Subsection 118-170(1) of ITAA 1997 gives spouses the options of choosing a single main residence or nominating a separate residence, it states:

If, during a period, a dwelling is your main residence and another dwelling is the main residence of your spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:

a) Choose one of the dwellings as the main residence of both of you for the period: or

b) Nominate the different dwelling as your main residence for the period.

As per section 103-25 of ITAA 1997 the above choice is made on the day you lodge your income tax return for the income year where either of the properties are sold. The way in which you prepare your income tax return is sufficient evidence of the choice you have made.

Splitting the main residence exemption between two properties

Under subsection 118-170(2) of ITAA 1997 if spouses choose separate main residences they must split the main residence exemption under the rules in Subsection 118-170(3) and (4), which state:

3) If your interest in the dwelling you chose was not, during the period, more than half of the total interest in the dwelling, the dwelling is taken to have been your main residence during the period. Otherwise, the dwelling is taken to have been your main residence for half of the period.

4) If your spouse's interest in the dwelling your spouse chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your spouse's main residence during the period. Otherwise the dwelling is taken to have been your spouse's main residence for half of the period.

Section 118-200 of the ITAA 1997 provides that if you do not qualify for a full exemption from CGT for the home, you may be entitled to a part exemption. For a partial exemption, you calculate your capital gain or capital loss as follows:

Capital gain or capital loss amount x Non-main residence days

Total days

As you ownership share of the farm property is greater than 50% you will only be able to claim a partial main residence exemption. For the above calculation the non-main residence days will be half the days from when you purchased the family home until when you disposed of either the farm property or family home. Your total days would be the total days from when you acquired the property in 199x until when you sold the farm property.

The Family Home

If you nominate a separate main residence being the farm property you will not be able to claim the main residence exemption on your 50% share of the family home. As your spouse's share of the family home is 50% or less than they will be entitled to a full main residence exemption for their share of the family home under Subsection 118-170(4) of the ITAA 1997.

The Farm Property

The farm property is a large property that covers 35 hectares and includes a dwelling that you consider to be your main residence, section 118-120 of the ITAA 1997 states:

(1) This Subdivision applies to a dwelling's adjacent land (if the same CGT event happens to that land or your ownership interest in it) as if it were a dwelling.

(2) Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.

(3) The maximum area of adjacent land covered by the exemption for the CGT event (the current event) is 2 hectares, less the area of the land immediately under the *dwelling.

For the purposes of section 118-120 of the ITAA 1997, Taxation Determination TD 1999/67 states that where your land (including the land on which your dwelling is situated) exceeds two hectares, you can apply the main residence exemption in subdivision 118-B of the ITAA 1997 to whichever area of land you choose in addition to the land on which your dwelling is situated.

Where a taxpayer has land that exceeds 2 hectares, Taxation Determination TD 1999/67 states at paragraphs 3 to 5:

(3) If your selected area of land can be separately valued, you 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 cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated 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 capital 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 can be 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 circumstances.

A capital gain or capital loss you make from the surrounding land is only disregarded under the main residence exemption if it is used primarily for private or domestic purposes in association with your dwelling.

In applying the above to your circumstances you will be able to choose which two hectares of the farm property your partial main residence exemption will apply to. However those 2 hectares must include the land directly under the dwelling. Additionally any surrounding land included within those 2 hectares must be used solely for private and domestic purposes.