Edited version of private advice

Authorisation Number: 1052072857284

Date of advice: 22 December 2022

Ruling

Subject: Main residence exemption

Question 1

Are the buildings on Lot X and Lot Y considered to be a single 'dwelling' as defined in section 118-115 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the Taxpayers entitled to a full main residence exemption for Lot X pursuant to section 118-110 of the ITAA 1997?

Answer

Yes.

Question 3

Are the Taxpayers entitled to a partial main residence emption for Lot Y pursuant to section 118-185 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Income year ending 30 June 20XX

Relevant facts and circumstances

In 19XX, the Taxpayers acquired Lot X. Lot X was established as the main residence of the Taxpayers at the time of acquisition.

In September 20XX, the Taxpayers acquired Lot Y, which was subject to a lease to the vendor. The Taxpayers derived rental income under the lease from the date of acquisition until the tenant moved out in xx April 20XX.

Lot X and Lot Y are residential zoned.

During the 20XX income year, the Taxpayers sold Lot X and Lot Y to a developer under separate contracts for sale.

The Taxpayers are Australian citizens and have not at any time since 19XX been foreign residents.

Renovation at Lot Y

Lot Y was available for use by the Taxpayers from xx April 20XX and the Taxpayers carried out repairs and renovation works on the house at Lot Y thereafter. The repairs and renovation works, which were completed in late August 20XX, included:

(a) partial renovation of the kitchen, including the installation of a new pantry and cabinetry;

(b) installation of cupboards and built-in shelving in various rooms;

(c) installation of fly screens;

(d) deep cleaning of the carpets;

(e) changing of window fittings and deep cleaning of curtains;

(f) construction of a compliant pool fence; and

(g) electrical work, including the installation of new electrical circuitry and additional and new light fittings.

In June 20XX, Taxpayer B had an operation on their foot. Such was their restricted mobility and risk of infection following the operation, the Taxpayers were unable to move into Lot Y until Taxpayer B had recovered. Taxpayer A started to move some of the Taxpayers' personal possessions in to Lot Y between July 20XX and xx September 20XX.

On xx September 20XX, by which time Taxpayer B's foot had sufficiently healed, the Taxpayers first slept at Lot Y.

Since xx September 20XX, the Taxpayers have integrated the way they live across both houses.

Use of Lot Y since xx September 20XX

The house on Lot Y contains 4 bedrooms, a study, living room, kitchen, lounge room, dining room, wine cellar, security system and swimming pool, but does not have a gym.

The Taxpayers eat and sleep at Lot Y and use the living spaces and study in Lot Y on a daily basis.

The Taxpayers use the garage on Lot Y to park their cars on a regular basis and have most (but not all) of their furniture and most of their personal effects and art at Lot Y. The Taxpayers use the kitchen, dining room and living space in Lot Y to entertain their family and guests.

The Taxpayers, and their children, grandchildren and guests use the swimming pool at Lot Y.

The garden at Lot Y is fully maintained by the Taxpayers.

Utilities (such as electricity, gas and water) for Lot Y are in the name of the Taxpayers.

Lot Y was last subject to land tax in the 20XX land tax year.

Use of Lot X since xx September 20XX

The Taxpayers' postal address remains at Lot X.

The building on Lot X contains a gym, rumpus room, wine cellar, 5 bedrooms, kitchen, living room, study, bathrooms and a garage with an electric car charger.

Lot X contains a home gym which is used daily for exercise by the Taxpayers either alone or with a personal trainer and for massages by a massage therapist. The home gym is integral to the daily lives of the Taxpayers.

The Taxpayers use a bathroom in Lot X which is also used for gardeners and other workers.

Taxpayer A's electric car is occasionally parked at the garage in Lot X to use the car charger.

Lot X is furnished with some furniture and artwork owned by the Taxpayers. Lot X has storage of the Taxpayer's possessions, including linen for both houses, a freezer to store food, their book collection and some of their wine. Lot X is also used to store equipment for the housekeeping, groundskeeping and gardening of both Lots.

The rumpus room is used by the Taxpayers' grandchildren to store their toys which are used on their visits. The Taxpayers use the trampoline in the yard on Lot X, along with their grandchildren.

Taxpayer A occasionally entertains guests at Lot X. The Taxpayers' children and other family members have stayed at Lot X for extended periods from time to time (between house moves and lift refurbishments). Taxpayer A has also occasionally slept at Lot X when unwell.

Other family members visiting from overseas have also stayed with the Taxpayers in Lot X.

The garden at Lot X is fully maintained by the Taxpayers. It contains fruit trees, the fruit from which are consumed by the Taxpayers.

Utilities (such as electricity, gas and water) for Lot X are in the name of the Taxpayers.

Lot X has been subject to land tax from the 20XX land tax year.

The Taxpayers have not rented out Lot X.

Common access between Lot X and Lot Y and common upkeep

The two Lots are connected with a common boundary line and the houses on each Lot are physically connected by a short path that provides unfettered access between them. This short pathway is used by the Taxpayers and their children, grandchildren, guests and domestic workers to access Lot X (the house and the gardens) from Lot Y.

The security system was reconfigured to allow unfettered access between Lot Y and Lot X, including the home gym on Lot X.

There is a mutual right of way granted over Lot Y and Lot X to allow access to them both. Lot Y cannot be accessed other than through the right of way over Lot X, which is used on a daily basis.

Local council issues separate rates notices for Lot X and Lot Y.

All expenses relating to Lot X and Lot Y are paid by the Taxpayers.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-110

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 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 118-150

Income Tax Assessment Act 1997 subsection 118-150(6)

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 subsection 118-185(1)

Income Tax Assessment Act 1997 paragraph 118-185(1)(b)

Income Tax Assessment Act 1997 subsection 118-185(2)

Reasons for decision

Question 1

Subsection 118-115(1) states that 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 word 'dwelling' is defined in The Macquarie Dictionary as 'a place of residence or abode; a house'.

In Campbell v O'Sullivan [1947] SASR 195 at 201, May J stated 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 meals.'

Taxation Determination 1999/69 (TD 1999/69) confirms that the term 'dwelling' as defined in section 118-115 can include more than one unit of accommodation where the units of accommodation are used together as one place of residence or abode.

Whether two or more units of accommodation are used together as one place of residence or abode for the purposes of the definition of 'dwelling' is a question of fact that depends on the particular circumstances of each case.

Paragraph 4 of D 1999/69 provides that factors relevant in considering whether units of accommodation are used together as one place of residence or abode include:

(a) whether the occupants sleep, eat and live in them;

(b) the distance between and the proximity of the units of accommodation;

(c) whether the units are connected;

(d) whether the units are capable of being sold separately;

(e) the extent to which the daily activities of the occupants in the units are integrated;

(f) how the units are shared by the occupants; and

(g) how costs of the units are shared by the occupants.

The presence or absence of any of these specified factors would not necessarily be determinative as the circumstances need to be viewed as a whole.

Since xx September 20XX, the unit of accommodation on Lot Y, the residence at which the Taxpayers began to sleep, eat and live, has effectively been integrated with the unit of accommodation on Lot X, the residence at which they slept, ate and lived prior to xx September 20XX, such that the two units of accommodation have together been used by the Taxpayers as one place of residence and constitute a single dwelling as defined in section 118-115.

In support of this conclusion, it is noted in summary that:

•         all utility accounts relating to Lot X have remained with the Taxpayers and all costs and expenses associated with Lot X have remained the responsibility of the Taxpayers (in addition to those relating to Lot Y);

•         all maintenance associated with Lot X has remained the responsibility of the Taxpayers (in addition to that relating to Lot Y);

•         the residence on Lot X continues to be utilised by the Taxpayers daily for exercise in the gym and to house or store furniture and other personal possessions;

•         the residence on Lot X continues to be utilised by the Taxpayers regularly for entertaining, for parking and charging of the electric car and to accommodate family as required; and

•         there is a close proximity and unfettered access between the respective units of accommodation (connected by a short path).

Question 2

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.

The 'ownership period' is defined in section 118-125 as the period on or after 20 September 1985 when the individual 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), an individual has an ownership interest in a dwelling that they acquire under a contract from the time when they obtain legal ownership of it (unless they have a right to occupy the dwelling at an earlier time) and, where the dwelling is disposed of under a contract, the ownership interest ends when their legal ownership of it ends.

The residence at Lot X, as a single unit of accommodation, was the main residence of the Taxpayers (being individuals) from the time they first had an ownership interest in the residence (i.e. when they obtained legal ownership of it in 19XX) until xx September 20XX, and since xx September 20XX has been one of two units of accommodation used together as the main residence of the Taxpayers.

Upon settlement of the sale of Lot X, the Taxpayers' legal ownership, and therefore ownership interest, in it will end, at which time the residence at Lot X will cease to be the Taxpayers' main residence (together with the residence at Lot X).

The dwelling on Lot X will therefore have been the main residence of the Taxpayers throughout their ownership period and they will be entitled to disregard any capital gain or loss from the disposal of Lot X in full pursuant to section 118-110.

Question 3

Pursuant to subsections 118-185(1) and (2):

(1) You get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if:

(a) you are an individual; and

(b) the dwelling was your main residence for part only of 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.

(2) You calculate your capital gain or capital loss using the formula:

CG or CL amount × Non-main residence days

Days in your ownership period

where:

CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

non-main residence days is the number of days in your ownership period when the dwelling was not your main residence.

The Taxpayers first obtained legal ownership of, and had an ownership interest in, the residence at Lot Y in September 20XX yet the residence only became their main residence on xx September 20XX (together with the residence on Lot X). Therefore, for the purposes of paragraph 118-185(1)(b), the residence on Lot Y has been the Taxpayers' main residence for part only of their ownership period.

The 'non-main residence days' for the purposes of subsection 118-185(2) includes the days in the Taxpayers' ownership period during which Lot Y was being tenanted (i.e. from September 20XX to xx April 20XX).

Subject to the operation of sections 118-135 and/or 118-150, the 'non-main residence days' for the purposes of subsection 118-185(2) may also include the days in the Taxpayers' ownership period after which Lot Y was being tenanted and before it became the Taxpayers' main residence (i.e. from xx April 20XX to xx September 20XX).

Where the dwelling becomes your main residence by the time it was first practicable for you to move into it after you acquired your ownership interest in it, section 118-135 extends the main residence exemption by treating the dwelling as your main residence from when you acquired the interest until it actually became your main residence.

The Commissioner is not satisfied that the nature of the repairs undertaken on the residence at Lot Y after the end of the tenancy were such that it was not practicable for the Taxpayers to move into it at that time. Therefore, section 118-135 does not apply to enable the Taxpayers to choose to treat the residence on Lot Y as their main residence from a time sooner than xx September 20XX.

Section 118-150 applies to enable you (an individual) to choose to treat a dwelling as your main residence from the time when the dwelling ceased to be occupied by tenants (rather than from the time you moved into it) if:

(a) you repair, renovate or finish building the dwelling;

(b) the dwelling that you repair or renovate becomes your main residence as soon as practicable after the work is finished; and

(c) it continues to be your main residence for at least three months.

Section 118-150 does not apply to enable the Taxpayers to choose to treat the residence on Lot Y as their main residence from the time when the residence ceased to be occupied by tenants on xx April 20XX, rather than from the time the Taxpayers moved into it on xx September 20XX.

This is because the dwelling that was repaired and renovated by the Taxpayers between xx April 20XX and late August 20XX (i.e. the residence on Lot Y) is not the dwelling that became their main residence as soon as practicable after the work was finished. The dwelling that became the Taxpayers' main residence as soon as practicable after the work was finished (on xx September 20XX) was the dwelling comprised of two separate units of accommodation (i.e. the residence on Lot Y together with the residence on Lot X), as confirmed in response to question 1 of this ruling.

The Taxpayers will therefore be entitled to disregard any capital gain or loss from the disposal of Lot Y in part pursuant to section 118-185 and the non-main residence days for those purposes is the number of days in the period from September 20XX to xx September 20XX.