Edited version of private advice

Authorisation Number: 1052179273171

Date of advice: 8 December 2023

Ruling

Subject: CGT - sale of a property

Question

Are the proceeds derived from the sale of a granny flat which was used solely for providing accommodation for your relatives subject to CGT?

Answer

Yes.

This private ruling applies for the following periods:

XX MONTH 20XX

The scheme commenced on:

XX MONTH 20XX

Relevant facts and circumstances

Due to the personal considerations, your relatives had decided to move over to Australia for good.

You are their relatives and were already residing in Australia.

Your relatives preferred to maintain their independence and privacy. So, in 20XX you put together some funds (along with a mortgage) to acquire a property to provide your relatives with permanent accommodation.

You selected a property which was within close proximity to where you live in order to provide easy access for visits.

A relative's health deteriorated, and they passed away in 20XX leaving another relative to live there before being admitted to a care facility in early 20XX.

The property was left vacant for a couple of years until you reached a decision to put on market for sale in MONTH 20XX.

The decision to sell the apartment was purely based on your relative's health.

You did not enter into a written and binding granny flat arrangement with your relatives. It was not possible because of cultural considerations.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-35

Reasons for decision

Issue

Capital gains tax - sale of a property

Question

Are the proceeds derived from the sale of a granny flat which was used solely for providing accommodation for your relatives subject to CGT?

Summary

You did not have a valid granny flat arrangement, so the granny flat exemption does not apply to your situation.

Even if you did have a granny flat arrangement, you are not exempt you from CGT on disposal of the property. The normal CGT rules apply in relation to the disposal of the property. A CGT event A1 occurred when you sold the property and CGT will apply to any capital gain you made on disposal. You are entitled to apply the 50% CGT discount.

Detailed reasoning

GRANNY FLAT ARRANGEMENTS AND CGT

A granny flat arrangement is a written agreement that gives an eligible person the right to occupy a property for life.

From 1 July 2021, capital gains tax (CGT) does not apply when a granny flat arrangement is created, varied, or terminated.

When the CGT exemption applies

A granny flat arrangement is exempt from CGT if:

•         the owner or owners of the property are individuals

•         one or more eligible people have an eligible granny flat interest in the property

•         the owners and the people with the granny flat interest enter into a written and binding granny flat arrangement. This arrangement must not be commercial in nature.

The exemption only applies to creating, changing or terminating a granny flat arrangement

Other CGT events that are not related to a granny flat arrangement, or sit outside the arrangement, are subject to normal CGT rules and may be liable to CGT. For example, the sale of a property that was used in a granny flat arrangement, which has since terminated, is subject to the normal CGT rules.

Granny flat interest

An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement.

A granny flat interest can be held in any type of property, provided it is a dwelling. This includes the owner's main residence or a separate property. It is not restricted to what is commonly referred to as a 'granny flat'.

The interest may be in part of or all the property.

Granny flat arrangement

To be exempt from CGT, a granny flat arrangement must:

•         be in writing

•         indicate an intention that the parties are legally bound

•         not be commercial in nature.

It should include:

•         the parties involved in the arrangement, including the individual(s) with an ownership interest in the property

•         the circumstances in which the arrangement can be varied or terminated

•         what happens when the arrangement is varied or terminated.

A granny flat arrangement can be entered into with any party, including family or friends.

Eligible people

For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:

•         have reached pension age

•         require assistance for day-to-day activities because of a disability.

Commercial arrangements

If the granny flat arrangement is commercial in nature, it is not exempt from CGT. In relation to the disposal of the granny flat, the normal CGT rules apply.

The most obvious commercial arrangement is where the holder of a granny flat interest is required to make payments (such as rent) at a market rate.

However, if the person with a granny flat interest only contributes towards ongoing household costs (such as electricity and water), the arrangement is unlikely to be considered commercial. This is because the arrangement is a reimbursement of actual costs.

Application to your circumstances

You did not have a granny flat arrangement. Therefore, the granny flat exemption rules do not apply to your circumstances.

We understand that there were cultural factors which made it impossible for you to enter into a granny flat arrangement in with your relatives. However, the Commissioner has no discretion to waive this requirement.

PROPERTY AND CAPITAL GAINS TAX

Most property except your main residence (home) is subject to capital gains tax.

This includes rental properties, holiday houses, hobby farms, vacant land and business premises.

CGT when selling your property

When you sell or dispose of a property you may make a capital gain or loss.

A capital gain or loss is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.

How capital gains or losses apply

If you make a:

•         net capital gain in an income year, you'll generally be liable for capital gains tax (CGT)

•         net capital loss, you can carry it forward and deduct it from your capital gains in later years.

You will have to report your capital gain or loss at the question 18 Capital gains of the Tax return for individuals (supplementary section).

Application to your circumstances

The normal CGT rules apply in relation to the disposal of the property. The property is a CGT asset. A CGT event A1 occurred when you sold it, and CGT will apply to any capital gain you made on disposal.

The net capital gain will be divided in accordance with the respective ownership interests of the co-owners. You will each be entitled to apply the 50% CGT discount as you have owned the property for more than 12 months.