Edited version of private advice

Authorisation Number: 1052116885495

Date of advice: 10 May 2023

Ruling

Subject: Main residence exemption

Question 1

Is the sale of the whole property a separate transaction for Capital Gains Tax (CGT) purposes from the re-purchase of the dwelling and one of the subdivided vacant allotments?

Answer

Yes.

Question 2

Do the terms of the contacts and simultaneous settlement result in the disposal of the whole property and accordingly the CGT main residence exemption can apply to the sale?

Answer

Yes.

Question 3

Does Part IVA apply to the sale of the property to prevent applying the main residence exemption?

Answer

The Commissioner has declined to rule on this question.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced:

1 July 20XX

Relevant facts and circumstances

You jointly purchased vacant land (less than 2 hectares) and constructed a dwelling on the land ('the property').

You moved into the dwelling upon completion of construction and treated the dwelling as your main residence.

In 20XX you separated from your spouse and the title of the property was transferred to you. You continued to reside in the property during this time. In 20XX your new spouse moved into the property to reside with you.

In 20XX your employment moved you to a different town, where you stayed for three/four nights per week, whilst continuing to reside at the property. This arrangement continued until 20XX, at which point the property was first rented out to unrelated tenants. This continued until 20xx (a period of less than 6 years).

In 20XX you and your spouse returned to the property and treated it as your main residence.

In 20XX you entered into negotiations with the purchaser and signed a contract ('original contract') to sell the property.

The sale included special conditions allowing the purchaser to undertake property development works and subdivide the property into various allotments prior to settlement. A further condition was that you and your spouse would acquire one of the vacant subdivided allotments from the purchaser.

In 20XX you amended the sale contract ('amended contract') with the purchaser, altering some of the terms of the original contract.

The amended contract changed the number of subdivided allotments the purchaser could undertake prior to settlement. A further condition was that you and your spouse were required to re-purchase the allotment with the dwelling as well as a subdivided vacant allotment. The purchase of the two allotments was to occur simultaneously with the sale settlement ('the two allotments').

The purchaser was responsible for all costs and received all benefits from the property development and subdivision. The property development works and subdivision was finalised by the purchaser during 20XX. The purchaser was liable for the legal costs and disbursements relating to the sale of the two allotments to you and your spouse.

You and your spouse entered into separate contracts for the two allotments. Despite the special conditions relating to the simultaneous settlements with the sale settlement, the two settlements occurred on different dates but close to the sale settlement date.

You contend that the two allotments were re-purchased at market value.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-115

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-165

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Questions 1 and 2

When you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks (section 112-25).

Section 118-110 provides that a capital gain or capital loss that happens in relation to a dwelling that is your main residence is disregarded if certain conditions are met; including that the dwelling was your main residence throughout the ownership period.

A dwelling is defined in section 118-115 and includes land adjacent to a dwelling to the extent that the land was used primarily for private or domestic purposes in association with the dwelling (section 118-120). The total area of land covered by the exemption is 2 hectares (subsection 118-120(3)). The Buninyong property satisfies the extended definition of 'dwelling'.

The ownership period of a dwelling is 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 (section 118-125). The meaning of ownership interest is provided in section 118-130 and generally provides that for land or a dwelling under a contract, the ownership interest is a reference to legal ownership.

The main residence exemption does not apply to a CGT event that happens in relation to adjacent land if that CGT event does not also happen in relation to the dwelling (section 118-165). Taxation Determination TD 92/171, considers that the main residence exemption extends to additional land acquired after the time of acquisition of the residence, as long as the requirements in section 118-120 and 118-165 are satisfied being:

• the additional land (including the area of land on which the dwelling is built) is adjacent to that on which the dwelling is situated
• the total area of land is not greater than 2 hectares
• the additional land is used primarily for private or domestic purposes in association with the dwelling
• the CGT event that happens in relation to the additional land also happens in relation to the dwelling (or your ownership interest in it).

You are an individual and the property was your main residence throughout your ownership period.

You sold the whole property under the one contract, with the purchaser responsible for undertaking property development works and subdividing the property into allotments prior to settlement. The land adjacent to the dwelling has been transferred to the purchaser at the same time as your main residence (i.e. under a single CGT event).

CGT event A1 has happened (section 104-10) and there is a change of ownership from you to the purchaser for the whole property. Section 118-165 does not apply to your circumstances and does not limit the main residence exemption under section 118-110.

You and your spouse purchased the two allotments under separate contracts and these property acquisitions are on different titles to the original property. You have an ownership interest in the two allotments from the time when legal ownership occurred (i.e. settlement date).

Question 3

The Commissioner has not made a private ruling in relation to Part IVA of the ITAA 1936, because making this private ruling could be considered prejudicial or unduly restrict the administration of the law.