Edited version of private advice

Authorisation Number: 1052132928560

Date of advice: 5 July 2023

Ruling

Subject: CGT - main residence - sold

Question 1

Are the house and granny flat to be treated as separate dwelling for the purposes of section 118-115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the main residence exemption under section 118-110 of the ITAA 1997 be available to the taxpayer in relation to the disposal of the Property?

Answer

Yes - but you will need to apportion it appropriately between the percentage of the residence that was used for assessable income purposes and the remaining percentage that was used as your main residence.

Question 3

Will the main residence exemption under section 118-110 of the ITAA 1997 be available to the taxpayer in relation to the disposal of the granny flat?

Answer

No.

This private ruling applies for the following period:

01 July 2022 to 30 June 2023.

The scheme commenced on:

01 July 2022.

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased the Property in 20XX.

The Property was less than 2 hectares.

You moved into the Property in September 20XX.

You used approximately 40% of the house to run a business and earned income from that business from 20XX to 20XX.

This business was operational in the main residence until July 20XX.

In 20XX you had a granny flat built at the rear of the Property.

The granny flat was fenced off from the main house and was fully self-contained.

You rented the granny flat between April 20XX and April 20XX.

In August 20XX you purchased a new Property and took up residence there.

You rented the subject Property until November 20XX.

You sold the Property inclusive of the granny flat in December 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 118-110

Income Tax Assessment Act 1997 - section 118-115

Income Tax Assessment Act 1997 - section 118-145

Income Tax Assessment Act 1997 - section 118-190

Reasons for decision

Main residence

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence if:

•         you are an individual, and

•         the dwelling was your main residence throughout your ownership period, and

•         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 under section 118-110(1) of the ITAA 1997.

Under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) you can continue to treat your dwelling as your main residence after it ceases to be your main residence. Under that section, if you use 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 while you use it for that purpose is 6 years

Under section 118-190 of the ITAA 1997, you only get a partial exemption if the dwelling sold was used for the purpose of producing assessable income during all of part of the period of ownership. However, under section 118-190(3), you can ignore the use of the "dwelling for the purpose of producing assessable income" during any period that you continue to treat it as your main residence to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

Application to your circumstances

You moved out of the Property in August 20XX. You then rented the Property from August 20XX to November 20XX prior to the sale of the Property approximately one month after the cessation of tenancy. You have satisfied the '6 year rule' as outlined in section 118-145 of ITAA 1997.

During your ownership period of the Property, you used approximately 40% of the Property for the purpose of producing assessable income. You operated your business in your main residence until July 20XX and moved into a new residence in August 20XX. Under section 118-190, you are allowed a partial exemption to main residence CGT as you are required to apportion it with the percentage of the Property that was used for income purposes in accordance with the formula contained in subsection 118-190(3).

Granny Flat

For your consideration, section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital 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, the ownership period, and must not have been used to produce assessable income.

The granny flat is considered commercial in nature as you advertised the dwelling for rent and made assessable income off that dwelling. The granny flat has never been established as your main residence, therefore section 118-110 of the ITAA 1997 will not apply to exempt any capital gain that results from the disposal of the granny flat.