Edited version of private advice

Authorisation Number: 1052286423943

Date of advice: 15 August 2024

Ruling

Subject: CGT - main residence exemption

Question 1

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

Answer

No, the two units of accommodation to be built will not be a single 'dwelling' as defined in section 118-115.

Question 2

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

Answer

Provided that the Applicants occupy Property A, and do not treat any other dwelling as their main residence, the capital gain or loss in disposal of Property A will be disregarded.

The capital gain or loss on disposal of Property B will not be disregarded pursuant to section 118-110.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

1.     The Applicants are two individuals, Individual A and Individual B.

2.     The Applicants' property is a residential property ('the Property').

3.     The Property is owned X% by Individual A and X% by Individual B.

4.     The Property is the Applicants' main residence.

5.     The Applicants have four children.

6.     Three of the Applicants' children currently reside with their parents at the Property.

7.     One of the Applicants' children ('Child A') has physical disability and is unable to care for themselves.

Proposed demolition and construction:

8.     The Applicants wish to plan for Child A's future care including, if possible, plans for after their death. As part of these plans, the Applicants are proposing to demolish their existing house and construct dual occupancy accommodation on the site (Property A and Property B, collectively the Properties).

9.     The dual occupancy will continue to be owned by Applicants in the current proportions.

10.  The dual occupancy will be governed by a strata sub-division that will allow two subsequent owners in the future.

11.  The two Properties will be physically connected, sharing a common central axis wall. There will not be internal access between the two Properties. The street entry to both Properties will have separate entries via remote control. The access by the main door will be by keypad, the code can be the same for both entrances.

12.  On completion of the construction of the dual occupancy, Property A will be occupied by the Applicants and their children, other than Child A. Property B will be occupied by Child A. If Child A's health deteriorates, Property B may also be by one or more of the Applicants' other 3 children. The Properties will be used solely for private and domestic purposes.

13.  The Applicants will be responsible for the daily running costs (food, water, gas, electricity, rates, internet subscriptions and the like) and maintenance costs for both Properties. No other family members will contribute to expenses associated with the Properties.

14.  The Properties will be utilised by the Applicants and their children as follows:

Property A:

15.  Living area will be used mainly by the Applicants.

16.  The living/dining room will be for the use of all family members.

17.  The Applicant will occupy the master bedroom.

18.  Meals for the family members, other than Child A (see below), will be prepared in Property A.

Property B:

19.  Child A will reside and sleep at Property B. The kitchen will be mainly for Child A's daily use.

20.  The bathroom in Property B will be constructed specifically for Child A's use and needs.

21.  An elevator will be installed in Property B to allow Child A to travelling between floors.

Potential sale of Property A and/or Property B:

22.  If Child A does not develop the skills to function independently and may need to move into a specially adapted supported living accommodation or to resume residing with their parents in Property A. Given this, the Applicants my sell one or both of Property A and B.

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

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

Summary

No, Properties A and B will not 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, the two units of accommodation to be built will not be one "dwelling" for the purposes of 118-115.

Question 2:

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

Summary

Provided that the Applicants occupy Property A, and do not treat any other dwelling as their main residence, the capital gain or loss in disposal of Property A will be disregarded.

The capital gain or loss on disposal of Property B will not be disregarded pursuant to section 118-110.

Detailed reasoning

8.      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.

9.      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 loss is made at the time of the event.

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

11.    Section 118-110 provides the basic conditions that must be satisfied for a capital gain or 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).

12.    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.

13.    '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).

14.    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)).

15.    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:

16.    Provided that the Applicants occupy Property A and do not treat any other property as their main residence, the capital gain or loss in disposal of Property A may be disregarded.

17.    As outlined in question 1, Property A and Property B will not be one 'dwelling' for the purposes of section 118-115.

18.    As the Applicants will not occupy Property B, they cannot treat Property B as their main abode or residence.

19.    Property B does not satisfy the requirements in subsection 118-110(1) to be exempt from capital gain or loss as Property B will not the Applicants main residence.

20.    Therefore, the Applicant will not be entitled to disregard any capital gain or loss from the disposal of Property B.

[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.