Edited version of private advice

Authorisation Number: 1052044956225

Date of advice: 26 October 2022

Ruling

Subject: CGT - partial exemption

Question 1

Are you entitled to a disregard in full any capital gain or capital loss you make from the sale of the unit?

Answer

No.

Question 2

Are you entitled to a disregard in part any capital gain or capital loss you make from the sale of the unit?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts

Person A (the deceased) purchased a unit (the unit).

The unit was acquired around MM YYYY and was always the main residence of the deceased.

The unit included a garage space.

The deceased had exclusive use of the garage

The garage has been used to produce assessable income from DD MM YYYY.

The income and deductions have been included in the deceased's income tax returns.

The deceased passed away on DD MM YYYY.

The garage continued to be used to produce assessable income and deductions have been claimed by the trustee of the estate.

The garage was sold as part of the sale of the unit to the same purchaser.

The garage is not physically connected to the unit.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-190

Reasons for decision

Summary

We accept that the garage is not adjacent land in your case. However, you are not entitled to disregard in full any capital gain or capital loss made from the sale of the unit and garage. The unit will qualify for the main residence exemption, however, there is no CGT exemption in relation to the garage. You will need to apportion the capital proceeds and cost base of the unit and garage.

A reasonable apportionment of the original cost of the unit can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case.

Taxation Determination TD 97/3 provides further information.

Detailed reasoning

A trustee can disregard a capital gain or capital loss that is made from the sale of a dwelling that was the deceased's main residence just before their death and was not then being used for the purpose of producing assessable income (section 118-195 of the ITAA 1997).

Dwelling is defined in section 118-115 of the ITAA 1997 as a unit of accommodation that is contained in a building and consists wholly or mainly of residential accommodation. Dwelling does not include adjacent land except as provided for in section 118-120 of the ITAA 1997.

Adjacent land

Section 118-120(5) of the Income Tax Assessment Act 1997 (ITAA 1997) states that an adjacent structure to a flat or home unit will be treated as if it were part of the dwelling, provided the same CGT event happens to it. Section 118-120(6) of the ITAA 1997 defines a garage as an adjacent structure, to the extent that it was primarily used for private or domestic purposes. The garage 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 (Taxation Determination (TD) 1999/68 Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling?).

Private and domestic use

Tax Determination 2000/15 states that whether or not land is used primarily for private or domestic use for the entire ownership period is a test of fact and degree. Where the land has not been primarily used for private or domestic purposes for some or all of the ownership period some apportionment may be required when calculating a capital gain or a capital loss.

Further, 'primarily for private or domestic purposes' does not mean exclusively for private or domestic purposes, but allows a small amount of non-private, non-domestic use. Equally, 'primarily' does not imply slightly more than 50% use. Primarily takes its ordinary meaning, that is chiefly or principally.

Application to your circumstances

In your case the garage is not attached to the unit and was sold with the unit. It will be an adjacent structure if the use has been primarily private or domestic. It was used to produce assessable income for X out of Y years of ownership.

Therefore, the garage was used for around Z% of the period of ownership for non-private or domestic purposes.

Weighted over time and usage, the garage has been used primarily for income generating purposes. The garage was not used primarily for private purposes. A significant use of an adjacent structure was for profit making purposes and as such it has not been used primarily for private or domestic purposes. Therefore, you cannot disregard any capital gain or capital loss made in relation to the sale of the garage.

As it has been established that the garage is an adjacent structure that has not been used primarily for private and domestic purposes, it is necessary to consider apportionment given the unit and garage were acquired together and sold together. The Commissioner does not accept that the garage does not have any value in this case, given it has been used to derive assessable income for a significant period of time.