Edited version of private advice

Authorisation Number: 1052286890635

Date of advice: 8 August 2024

Ruling

Subject: Main residence exemption

Question 1

If you sell the downstairs unit and upstairs unit at XXXX at the same time, will you be able to claim the full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Based on the nature of your usage and the Commissioner's view of the definition of 'dwelling' contained in Taxation Determination TD 1999/69 Income tax: capital gains: can the term 'dwelling' as defined in section 118-115 of the Income Tax Assessment Act 1997 include more than one unit of accommodation?, the Commissioner is satisfied that the two units have been used together as a single dwelling and you are therefore eligible for the full main residence exemption on the sale of the property.

Question 2

If you consolidate the titles of the downstairs unit and upstairs unit at XXXX and then sell the property, will you be able to claim the full main residence exemption under Subdivision 118-B of theITAA 1997?

Answer

Yes.

The consolidation of the titles does not result in a CGT event (subsection 112-25(4) of the ITAA 1997). Based on the nature of your usage and the Commissioner's view of the definition of 'dwelling' contained in TD 1999/69, the Commissioner is satisfied that the two units have been used together as a single dwelling and you are therefore eligible for the full main residence exemption on the sale of the property.

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

The property is located at XXXX (the property).

The property has a downstairs unit and an upstairs unit. These two units are currently on separate titles.

The land the property is on was first purchased on DD MM 20YY by your late spouse (Person A) as the sole owner, with a building already constructed. Between the date of purchase and 20YY Person A leased out the building.

In 20YY the building was demolished, and construction commenced to build the current residential premises on the land. The construction was completed in 20YY.

The property was split into two separate units, both accessible via a shared foyer entrance. There is a lift and internal stairwell that connects the units.

After initial construction was completed, you moved into the property with Person A - however the construction of the upstairs unit required additional work to be completed before it could be habitable. As such, you moved into the downstairs unit and made this your main residence. The issue with the upstairs unit was resolved in early 20YY.

Shortly thereafter, the property was subdivided into two titles: one for the upstairs unit and one for the downstairs unit. On DD MM 20YY, Person A transferred partial interest in the downstairs unit to you.

The property was constructed with the intention that you and Person A would live in the downstairs unit but still use the upstairs unit in conjunction with the downstairs unit. The upstairs unit was furnished as a standalone apartment to allow family/guests to stay with you while also having a degree of independence. As the upstairs unit was furnished as a separately contained apartment, you believed subdivision was required.

The upstairs unit has only ever been used for personal purposes. It was used for family/guests to stay in when visiting. During both the short-term and longer-term stays, the family/guests would frequently share meals and use the home theatre and entertainment area in the downstairs unit with you. The family/guests did not pay rent when they stayed. The upstairs unit has also been used for storage of personal items.

When designing the property (knowing that the upstairs unit would be available for storage and guest usage), the downstairs unit was designed more towards entertainment purposes.

On DD MM 20YY, Person A passed away. At the time of their death:

•         You and Person A were living in the downstairs unit as your main residence, while also using the upstairs unit in conjunction with the downstairs unit.

•         Person A was not a foreign resident or excluded foreign resident.

•         Person A's interest in both units passed to you.

Following their death, you have continued to use the downstairs unit as your main residence, with the upstairs unit being used in conjunction with the downstairs unit.

The upstairs and downstairs units have never been used to produce assessable income at any time during your or Person A's entire ownership period. During your entire ownership period, you have remained an Australian resident for taxation purposes.

While the downstairs and upstairs units are on separate titles and could potentially be sold separately, significant alterations would need to be made to the property as a whole (for example, altering the internal stairwell that connects the two units, and the alteration of the downstairs unit to accommodate for the additional space no longer available via the upstairs unit for storage).

Assumptions

The way the upstairs unit has been used by you to date will continue to be the way you use the upstairs unit up until the point of sale (for example, you will not use the upstairs unit to produce assessable income).

You will remain an Australian resident for taxation purposes until the date the property is sold.

You will not make any adjustments or alterations to the overall property to allow the units to be sold separately to different purchasers.

When you sell the property (in the instance where you do not consolidate the two titles prior to sale), the two units will be sold to the same purchaser.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 112-25(4)

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 118-120

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-197