Edited version of private advice

Authorisation Number: 1052051121114

Date of advice: 6 February 2023

Ruling

Subject:CGT - main residence

Question 1

Will Ms X be able to choose to continue to treat The Property as her main residence after October 20XX pursuant to subsection 118-145(1) of the Income Tax Assessment Act 1997 (ITAA 1997), where it is vacant with no modifications?

Answer

Yes.

Question 2

Will Ms X be able to choose to continue to treat The Property as her main residence pursuant to subsection 118-145(1) of the ITAA 1997 if The Property is modified to add a commercial kitchen in one bedroom, with minor structural modifications in that bedroom and no changes to other rooms?

Answer

Yes.

Question 3

Will Ms X be able to choose to continue to treat The Property as her main residence pursuant to subsection 118-145(2) of the ITAA 1997 if The Property is used to provide commercial residential accommodation and some food to residents (for example, as a 'bed and breakfast'), where the income generated from The Property is primarily from the commercial residential accommodation and not from the provision of food?

Answer

Yes, subject to the maximum period allowable under subsection 118-145(2) of the ITAA 1997.

Question 4

Will Ms X be able to choose to continue to treat The Property as her main residence pursuant to subsection 118-145(1) or 118-145(2) of the ITAA 1997 if The Property is further modified to convert the island bench of the original kitchen to a bar?

Answer

Yes, subject to the maximum period allowable under subsection 118-145(2) of the ITAA 1997 (where applicable).

Question 5

Will Ms X be able to choose to continue to treat The Property as her main residence pursuant to subsection 118-145(2) of the ITAA 1997 if The Property is used to provide more substantial commercial dining activities (for example, as a restaurant), such that the income generated from The Property is primarily from the provision of food, whilst still providing commercial residential accommodation?

Answer

Yes, subject to the maximum period allowable under subsection 118-145(2) of the ITAA 1997.

Question 6

Will Ms X be able to choose to continue to treat The Property as her main residence pursuant to subsection 118-145(2) of the ITAA 1997 if Ms X merely elected to utilise The Property for the service of meals and or a restaurant?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Relevant facts and circumstances

Ms X is a resident of Australia for taxation purposes.

Ms X purchased The Property in 20XX.

Ms X moved into The Property as soon as practicable after settlement and treated The Property (a dwelling) as her main residence since the purchase.

In October 20XX, Ms X moved out of The Property to her new home. Ms X and the family are renting the new home at market rates and she is not eligible to claim this new home as her main residence.

Ms X has architect produced drawings for a modification of The Property. Modifications proposed are:

•         minor wall modifications in one bedroom only (an original bedroom converted into a commercial kitchen); and

•         the original kitchen is being retained as a serving area, but the island bench will be converted into a bar setup.

The addition of the commercial kitchen is to allow The Property to be used as a bed and breakfast. With the exception of the one bedroom being converted into a commercial kitchen, the original bedrooms and bathrooms of The Property will be maintained. These will be utilised as either boutique dining spaces or to provide commercial residential accommodation.

The Property is currently zoned to be allowed as a residence and/or small commercial residential accommodation such as a bed and breakfast. Ms X has been notified of a probability of the area being rezoned to allow for more significant commercial operations.

It is expected that if the zoning does not change to allow for use as a restaurant, the bar and the commercial kitchen would only be available for guests at the bed and breakfast and for private use. If zoning does change and The Property can be used as a restaurant it is expected the restaurant and the bar would be open to restaurant patrons.

It is estimated that roughly XX% of The Property by floor area will be utilised as commercial residential accommodation. The remaining floor space will consist of common areas, general living areas, the commercial kitchen and, if zoning is changed to permit, the restaurant.

Assumptions:

1.    Ms X will not treat any other dwelling as her main residence during her ownership period of The Property for the purposes of Subdivision 118-B of the ITAA 1997.

2.    For the purpose of question 2 of this ruling, The Property will not be used to provide commercial residential accommodation or for any other assessable income producing purpose.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 subsection 118-110(1)

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 subsection 118-115(1)

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 subsection 118-130(2)

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 subsection 118-145(1)

Income Tax Assessment Act 1997 subsection 118-145(2)

Income Tax Assessment Act 1997 subsection 118-145(3)

Income Tax Assessment Act 1997 subsection 118-145(4)

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

CGT event A1 under section 104-10 happens if an entity disposes of a CGT asset. A CGT asset includes an interest in real property (subsection 108-5).

Pursuant to subsection 118-110(1), a capital gain or loss made from CGT event A1 that happens in relation to a CGT asset that is a dwelling, or an ownership interest in it, is disregarded if:

(a) you are an individual;

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

(c) your ownership interest did not pass to you as a beneficiary in, or as a trustee of, a deceased estate.

Broadly, this exemption may not apply in full if the dwelling was your main residence during part only of your ownership period or (subject to the application of section 118-145) the dwelling was used for the purpose of producing assessable income.

'Ownership period' is defined in section 118-125 as the period on or after 20 September 1985 when you had an ownership interest in the dwelling (or land on which the dwelling is later built).

In accordance with subsections 118-130(2) and (3), you have an ownership interest in a dwelling that you acquire under a contract from the time when you obtain legal ownership of it (unless you have a right to occupy the dwelling at an earlier time) and, where the dwelling is disposed of under a contract, your ownership interest ends when your legal ownership of it ends.

Absences

Section 118-145 sets out rules that may extend the exemption. Subsection 118-145(1) provides that you can choose to continue to treat a dwelling as your main residence if it ceases to be your main residence. The period for which the dwelling can continue to be treated as your main residence depends on whether or not it is used for the purpose of producing assessable income.

Pursuant to subsection 118-145(2), if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under section 118-145 while you use it for that purpose is 6 years. In contrast, and pursuant to subsection 118-145(3), if you do not use the dwelling for an assessable income producing purpose, you can treat it as your main residence under section 118-145 indefinitely.

Except for a particular exception provided for under section 118-140, where the choice to continue to treat a dwelling as your main residence after you have moved out of it is made, no other dwelling can be treated as your main residence during the same period (subsection 118-145(4)).

Dwelling

Under subsection 118-115(1), a dwelling is defined to include a unit of accommodation that is a building or is contained in a building, and consists wholly or mainly of residential accommodation. It also includes land immediately under the unit of accommodation.

The definition in section 118-115 is an inclusive one so the ordinary meaning of the word is also relevant for consideration. The Macquarie Dictionary[1] defines the word 'dwelling' as 'a place of residence or abode; a house; continued or habitual residence'. Whether a structure is a dwelling for CGT purposes will depend on the facts of each case.

In Campbell v O'Sullivan [1947] SASR 195 at 201, it was held that:

"... 'Dwelling' ordinarily signifies a place of abode or residence, a tenement, habitation, or house, which premises a person or persons are using as a place for sleeping, and usually for the provision of some or all of their meals. The word is not used as a term of art, and has to be interpreted in accordance with its ordinary, proper, and grammatical sense in the context in which it appears..."

The choice under section 118-145 can only be made for a building that is a dwelling.

A building that is originally considered a dwelling but is converted into commercial premises and is unsuitable for residential accommodation will cease to be considered a dwelling within the ordinary meaning of the term or its extended statutory meaning in section 118-115 from the time the building started to be converted into commercial premises (see ATO ID 2005/19[2]).

Application to your circumstances

The Property was Ms X's main residence from the time when she obtained legal ownership of it until October 20XX. Given that Ms X will not treat another dwelling as her main residence for the purposes of Subdivision 118-B during her ownership period of The Property, Ms X will be able to choose to continue to treat The Property as her main residence from the time The Property ceased to be her main residence.

The period for which The Property can continue to be treated as Ms X's main residence depends on whether or not it is used for the purpose of producing assessable income and whether or not it ceases to be considered a dwelling as a result of having been converted into commercial premises and becoming unsuitable for residential accommodation.

As long as Ms X does not use The Property for an assessable income producing purpose and The Property remains a dwelling within the ordinary and extended meaning of the term, she can treat it as her main residence indefinitely pursuant to subsection 118-145(3).

If Ms X uses The Property for the purpose of producing assessable income and The Property remains a dwelling within the ordinary and extended meaning of the term (on the basis it remains suitable for residential accommodation), pursuant to subsection 118-145(2) the maximum period that Ms X can treat The Property as her main residence while she uses it for that purpose is 6 years.

If The Property does not remain a dwelling within the ordinary and extended meaning of the term (on the basis it is, for example, converted into a restaurant and not suitable for residential accommodation), The Property will cease to be considered a dwelling from the time it started to be converted and Ms X will not be able to apply section 118-145 to treat The Property as her main residence beyond that time.

[1] Macquarie Dictionary Publishers, 2023.

[2] Whilst this ATO ID is withdrawn, it remains applicable.