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Edited version of private advice
Authorisation Number: 1012644835143
Ruling
Subject: CGT and application of the main residence exemption
Question and answer:
Are you entitled to apply the full CGT main residence exemption exclusively to the portion of property acquired post CGT?
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
You and another party acquired a vacant block of land in joint names pre 20 September 1985.
The property sits on 1 land title and is greater than 2 hectares in size.
A dwelling was built on the land and capital improvements were made pre 20 September 1985.
In post 20 September 1985, you acquired the remaining 50% share of the property.
The property was always held as your main residence and has never been used to earn assessable income.
You are disposing of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Section 108-5.
Income Tax Assessment Act 1997 Section 104-10.
Income Tax Assessment Act 1997 Subsection 104-10(5).
Income Tax Assessment Act 1997 Section 118-110.
Income Tax Assessment Act 1997 Section 118-120.
Reasons for decision
Capital gains tax
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset in which you have an ownership interest.
Buildings and land are CGT assets as defined under section 108-5 of the ITAA 1997, and the disposal of a CGT asset triggers a CGT event under section 104-10 of the ITAA 1997. The most common event is CGT event A1 which occurs when you dispose of a CGT asset to someone else. Subsection 104-10(5) of the ITAA 1997 provides that any capital gain or loss is disregarded if you acquire the asset before 20 September 1985.
In your case you purchased a property as joint tenants post 20 September 1985, built a dwelling on the property and occupied it as your main residence. The building of the dwelling and all capital improvements were completed prior to 20 September 1985. However post 20 September 1985 you acquired the remaining 50% share of the property. Therefore you have a pre CGT interest and a post CGT interest in this property. Disposal of this property will trigger CGT event A1 and you will be subject to CGT on your post CGT interest.
Main residence exemption
Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, must not have been used to produce assessable income, and the land surrounding the dwelling (including the land on which the dwelling is situated) must not be more than 2 hectares.
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). The remaining land as not covered by the main residence exemption and therefore any capital gain or capital loss attributable to this portion of land cannot be disregarded.
You can apply the main residence exemption to whichever area of land you choose (inclusive of the land on which your dwelling is situated), up to the maximum of two hectares. The areas need not be contiguous. Any land that exceeds the exempted area will be subject to CGT provisions.
In your case you are disposing of a property where the land is greater than 2 hectares. Therefore you will only be able to apply the main residence exemption to an area of 2 hectares, including the land on which the dwelling stands.
Ownership interest
Taxation Determination TD 2000/31 Income tax: capital gains: if you own an interest in a CGT asset and you acquire another interest in that asset, do the interests remain separate CGT assets for capital gains purposes or do they become a single asset?, discusses the Commissioners view with regards to ownership interests of CGT assets.
TD 2000/31 states that if a taxpayer owns an interest in a CGT asset and they acquire another interest in the asset, the interests remain separate assets. This means that the underlying asset is not distinguished as separate assets, only the ownership interests are distinguished as separate assets. Therefore you cannot differentiate which portion of the asset is a pre CGT asset and which is a post CGT asset.
When applying the main residence exemption where the land is greater than 2 hectares you are required quantify which portion of the land you are electing. Once you elect which area of land will be excluded from the main residence exemption you will have a 50% pre CGT interest and a 50% post interest in this portion of land.
Therefore in your case you cannot apply the main residence exemption exclusively to a post CGT area of the property as there is no specific piece of the land that can be quantified as post CGT.