Edited version of private advice

Authorisation Number: 1052253418536

Date of advice: 24 May 2024

Ruling

Subject: CGT - main residence exemption

Question

Can you apply the partial main residence exemption provided for in section 118-185 of the Income Tax Assessment Act 1997 to the sale of your industrially zoned office/warehouse property located at XXXX?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

On DD MM 20YY, you purchased an industrial usage zoned office/warehouse unit located at XXXX (the factory unit property).

The factory unit property has a mezzanine floor which is fully carpeted and a bathroom (which includes a toilet, vanity, and shower). There is also a small kitchenette with a sink and cupboards (but no cooking facilities).

The property was originally used to store personal collections.

In MM 20YY, you moved into the factory unit property.

The contract for the purchase of the property refers to it as "light industrial". There is a clause within the relevant zoning regulations that allows for "temporary overnight accommodation for the working population and businesses in the area".

The contract also contained an occupation certificate.

In MM 20YY you purchased a residential property. On DD MM 20YY, you moved into this residential property.

The factory unit property was sold on DD MM 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you are an Australian resident and the dwelling:

•         has been the home of you, your partner and other dependants for the whole period you have owned it

•         has not been used to produce income - that is, you have not run a business from it, rented it out or 'flipped' it (bought it to renovate and sell at a profit)

•         is on land of 2 hectares or less.

If you meet these conditions, you do not pay tax on any capital gain when you sell your home and you ignore any capital loss.

If you do not meet all these conditions, section 118-185 of the ITAA 1997 provides that you may still be entitled to a partial exemption.

Section 118-115 of the ITAA 1997 defines a dwelling as:

•         A unit of accommodation that:

o   is a building or is contained in a building; and

o   consists wholly or mainly of residential accommodation; and

•         a unit of accommodation that is a caravan, houseboat or other mobile home; and

•         any land immediately under the unit of accommodation.

A dwelling is anything used wholly or mainly for residential accommodation, such as:

•         a house or cottage

•         an apartment or flat

•         a strata title unit

•         a unit in a retirement village

•         a caravan, houseboat or other mobile home.

As the factory unit is in a light industrial zone, it is unable to be legally used wholly or mainly for residential accommodation. Choosing to reside in a property does not make it automatically eligible to be considered a "dwelling". The clause which allows "temporary overnight accommodation" in the relevant zoning regulations for the property confirms that the factory unit has not achieved the required approvals to be used wholly or mainly for residential accommodation.

The state government body responsible for planning and infrastructure states that the provision of an occupation certificate merely confirms that the factory unit has been inspected and meets the requirements for occupancy, meaning that it is fit to be occupied (as in used) in accordance with the property's Building Codes of Australia (BCA) classification; it is not a certificate of approval for residential use.

As the property located at XXXX does not meet the definition of a "dwelling" for the purposes of Subdivision 118-B of the ITAA 1997; the partial main residence exemption provided for under section 118-185 will not apply to the sale of the property.