Edited version of private advice

Authorisation Number: 1052206784881

Date of advice: 3 January 2024

Ruling

Subject: Extending the main residence exemption to include adjacent land

Question 1

Can the land adjacent to the dwelling be treated as being used primarily for private and domestic purposes in association with the dwelling under section 118-120 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Can the main residence exemption be applied to two hectares of the land including the dwelling without having to verify the actual private or domestic usages of the adjacent land associated with the dwelling?

Answer

Yes.

Question 3

Can the capital proceeds and the cost base or the reduced cost base be apportioned on an area basis when calculating the assessable capital gain or the capital loss made on the remainder of the land exceeding the two hectares comprising the dwelling and the adjacent land?

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

On XX/XX/20XX, the deceased and their spouse purchased the land as joint tenants.

The dwelling was constructed in 19XX.

On XX/XX/20XX, the deceased's spouse passed away.

The market value of the land as at the date of the deceased's spouse's death was $XXXX.

Following the death of the deceased's spouse, the deceased became the sole owner of the land by survivorship.

On XX/XX/20XX, an application was processed to transfer the deceased's spouse's half share in the land to the deceased.

There were no improvements made to the land after the deceased's spouse passed away.

The deceased passed away on XX/XX/20XX.

The deceased was an Australian resident for tax purposes.

Probate was granted on XX/XX/20XX.

At the date of death, the deceased was the sole registered proprietor of the land.

The land has an area of X hectares.

The market value of the land on the date that the deceased passed away was $XXXX

The deceased resided in the dwelling on the land which was their main residence throughout their ownership period.

The land surrounding the dwelling comprises of fenced front and rear paddocks, horse shelters, a shed and a canopy.

At the date of the deceased's death, the land was zoned as rural land with a proposed zoning of business development.

The exact usages of the land are unknown; however, the land was not used to produce assessable income at any time during the deceased's ownership period.

The total building area excluding the paddocks is X square metres.

Horses were kept on the land at various times for private use.

On XX/XX/20XX, the land was sold for $XXXX with settlement occurring on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-120

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own.

A capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence is disregarded if:

•         you are an individual;

•         the dwelling was your main residence throughout your ownership period;

•         the property was not used to produce assessable income, and;

•         any land on which the dwelling is situated is not more than two hectares.

Section 118-120 of the ITAA 1997 allows an exemption to include land which is adjacent to a dwelling as part of your main residence provided it is used primarily for private or domestic purposes and the same CGT event happens to the land. Land is adjacent to your dwelling if it is close to, near, adjoining or neighbouring the dwelling (Mayor of Wellington v. Mayor of Lower Hutt AC 773 at 775-776).

The application of the extension to adjacent land is determined at the time of CGT event which happens to the dwelling.

Taxation Determination TD 1999/67 Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares, can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land?

states that you can apply the main residence exemption to whichever area of land you choose in addition to the land on which your dwelling is situated, provided that the total of the land does not exceed two hectares and that a capital gain or loss you make from the land is only disregarded under the main residence exemption if it is used primarily for private or domestic purposes in association with your dwelling.

Taxation Determination TD 1999/68: Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling? states thatfor the purposesof section 118-120 of the ITAA 1997, land is adjacent to the dwelling if it is close to or near the dwelling.

Taxation Determination TD 97/3: Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?, states that for the purposes of section 112-25 of the Income Tax Assessment Act 1997, the extent to which it is reasonable to attribute each element of the cost base and reduced cost base of the original land to the corresponding element of the cost base and reduced cost base of each new block, we would accept any approach that is appropriate in the circumstances of the particular case, e.g., on an area basis or relative market value basis.

In your case, the entire property was used for private purposes including the main residence and no area of the dwelling or the surrounding land was used to produce assessable income. Therefore, the land adjacent to the dwelling can be treated as being used primarily for private and domestic purposes.

As the land was used only for private and domestic purposes, the main residence exemption can be applied to any two hectares of the land, including the dwelling, provided that the total amount does not exceed two hectares. The exact usages of the land used for private and domestic purposes would not be relevant.

Furthermore, as the land was used only for private and domestic purposes, any approach that is reasonable would be accepted to attribute each element of the cost base and the reduced cost base or the original land. Although the land itself is not being subdivided, the same principles would apply that are outlined in TD 97/3.