Edited version of private advice

Authorisation Number: 1052180927337

Date of advice: 22 November 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Are Properties A and B considered to be one 'dwelling' for the purpose of section 118-115 of the Income Tax Assessment Act 1997 ('ITAA 1997')[1]?

Answer

Yes.

Question 2

Can the capital gain made on the disposal of Property A and B be disregarded pursuant to section 118-110?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.     In 19XX, the taxpayers purchased and became the registered proprietors of Property A.

2.     The taxpayers moved into Property A after settlement occurred.

3.     At the time of purchase, Property A was a self-contained property. The property featured:

•        a fence on the entire north boarder (separating Property A form Property B)

•        a dense tree line just south of the above fence

•        a driveway and paved parking area on the northern side of the property.

4.     In 19XX, the taxpayers purchased and became the registered proprietors of Property B.

5.     Property A is adjacent to Property B.

6.     The taxpayers stated that the reasons behind purchasing Property B were:

•        to create a muti-generation home, and

•        to accommodate other family members (should the need arise).

7.     At the time of purchase, Property B was a self-contained property. featured:

•        a carport and driveway on the northern side of the land

•        an outdoor pool on the north-eastern edge of the land; and

•        a large outdoor garden on the eastern side of the land

8.     During the taxpayers' ownership period, significant works were undertaken at both Property A and B to integrate their home

Use of the Properties

9.     The taxpayers resided in Property A and B, they considered Property A and B (as a whole) to be their family home.

10.  The taxpayers and their family resided with them at Property A and B at certain periods of time.

11.  Family members resided in Property A and B had unrestricted movement between the properties. The daily lives of family members were integrated.

12.  Property A and B are physically connected in serval ways.

13.  Property A and B share the same keys for security gates and doors.

14.  The taxpayers and their family integrated their daily activities over both Property A and B. They utilised separate rooms within the properties for separate tasks.

15.  The taxpayers were the only individuals pay the daily running costs (food, water, gas, electricity, rates, internet subscriptions and the like) for the properties. No other family members contributed to the household expense.

16.  The taxpayers never used Property A or Property B to produce assessable income.

17.  The taxpayers disposed Property A and B simultaneously.

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

Are Properties A and B considered to be one 'dwelling' for the purpose of section 118-115?

Summary

Yes, Properties A and B are considered to be a single 'dwelling' as defined in section 118-115.

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.

2.     The term 'dwelling' is not defined in the legislation and therefore takes on its ordinary meaning. The Macquarie Dictionary defines the term as 'a place of residence or abode; a house'.

3.     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.

4.     Taxation Determination 1999/69 Income tax: capital gains: can the term 'dwelling' as defined in section 118-115 of the Income tax assessment 1997 include more than one unit of accommodation? (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.

5.     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.

6.     Paragraph 4 of TD 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, at 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 occupant.

Conclusion

7.     Based on the information provided, Properties A and B are considered to be one 'dwelling' for the purpose of section 118-115.

8.     In support of this conclusion, it is noted that:

•         There is a close proximity and unfettered access between the respective unit of accommodation

•         Properties A and B are connected

•         Properties A and B are utilised by the taxpayers

•         The taxpayers and their family integrate their daily activities over both properties; and

•         All utility accounts have remained with the taxpayers.

Question 2:

Can the capital gain made on the disposal of Properties A and B be disregarded pursuant to section 118-110?

Summary

Yes, the capital gain can be disregarded pursuant to section 118-110

Detailed reasoning

9.     Net capital gains are included as assessable income under section 102-5. Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens

10.  CGT event A1 occurs when you dispose of a CGT asset, that is, where a change of beneficial ownership occurs from you to another entity (section 104-10). The capital gain or capital loss is made at the time of the event.

11.  Subsection 108-5(1) provides that any kind of property is a CGT asset.

12.  Section 118-110 provides the basic conditions that must be satisfied for a capital gain or capital loss made from a CGT event relating to a CGT asset that is a dwelling, or an ownership interest in it, to be disregarded.

The conditions which must be satisfied for the exemption to apply to you are:

a.    you are an individual[2]

b.    the dwelling was your main residence throughout your ownership period

c.     the interest did not pass to you as a beneficiary in, and you did not acquire it as the trustee of, the estate of a deceased person[3]

d.    the capital gain or loss arises out of one of the specified CGT events, including CGT event A1[4]; and

e.    at the time the CGT event happens, you are not an 'excluded foreign resident' as defined in subsection 118-110(4) and you are not a foreign resident who doesn't satisfy the 'life events test' pursuant to subsection 118-110(5).

13.  Subsection 118-115(1) defines a dwelling to include a unit of accommodation that is a building and consists wholly or mainly of residential accommodation, and any land immediately under the unit of accommodation.

14.  '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).

15.  In the context of a dwelling that is not a flat, you have an ownership interest if you have a legal or equitable interest in the land on which it is erected (paragraph 118-130(1)(b)).

16.  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.

Application to the taxpayers' circumstances:

17.  The taxpayers are individuals.

18.  CGT event A1 occurred when the taxpayers disposed properties A and B

19.  The relevant conditions in section 118-110 are satisfied.

[1] All future references to the legislation are to the Income Tax Assessment Act 1997, unless otherwise stated.

[2] An individual is defined in subsection 995-1(1) to mean a natural person.

[3] Subsection 118-110(1) of the ITAA 1997.

[4] Paragraph 118-110(2)(a) of the ITAA 1997.