Edited version of private advice

Authorisation Number: 1052296364840

Date of advice: 13 September 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Are you eligible to claim the main residence exemption for the dwelling and adjacent land up to two hectares located at the property?

Answer

Yes.

Question 2

Are you eligible to apply the Capital gains tax (CGT) discount on the remaining hectares of the property, after applying the main residence exemption on up to two hectares?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On or around mid-to-late 19XX (several years ago), you purchased land (the Property) for $x, plus $x in land transfer (stamp) duty. GST did not apply to the purchase of the Property.

Immediately after you acquired the property, you constructed a dwelling on the Property which was completed in or around 200X. You have occupied the dwelling as your main residence and family home since that time. Further, the dwelling has never been used for the purpose of producing any assessable income.

The Property consists of X hectares (over 2 hectares) and is under one title.

Carrying on a business on a portion of the Property

On or around early-to-mid 20XX, you commenced a business (the Business) as a sole trader. You operated the Business on the Property and used less than half a hectare of the land for the Business.

On or around mid 200X, you obtained an Australian Business Number (ABN) and registered the Business for GST. Both of those registrations remain active as at the date of this application.

You, as an individual sole trader, had carried on a business on the property that involves various business activities; however, from mid-to-late 20XX most of these activities are carried on by the Family Trust.

From time to time, you continue to conduct business activities in relation to the business as a sole trader. Such activities are minimal and are done on an ad-hoc basis.

Two sheds were constructed by you on the property in connection with the businesses. One shed, built in or around 200X, was used for business and storage purposes. This shed is approximately X square meters.

In 200X, the second shed was built and was used for the same purposes. This shed is approximately X square meters.

The Business continues to be operated predominately by the Family Trust and operates from the Property, and your sole trader business continues to operate on an ad hoc basis under your personal ABN.

The trust was settled around mid-to-late 20XX.

You are the director of the corporate trustee of the trust, and also the beneficiary.

Different uses of the property

Overall, the Property is "divided" into three areas:

(a)         Residential Section - an area containing the dwelling occupied by you as your main residence and family home. This part of the land includes the curtilage and area surrounding the dwelling. It includes space where your children have played over the years, and space for private infrastructure such as septic tanks, etc, because the Property is not connected to town water. You estimate that this part of the land is approximately 2 hectares;

(b)         Business Section - an area containing the two sheds and storage space used for certain activities in connection with the Business, including via the family trust that operates from the Property. You estimate this part of the land is approximately X hectares; and

(c)         Vacant Section - an area that is vacant, which you and your family used to maintain your personal animals. The family also used the area for enjoyment and leisure. The area contains a dam and a shed. The Vacant Section has been used for storage from time to time over the years. You estimate this part of the land is approximately X hectares. No agistment or business activities have been carried out in this section of the property.

No business activities have ever been conducted on the residential section of the property.

You have never taken any steps to develop the land or subdivide the Property. Further you have never chosen to treat any other dwelling as your main residence during your period of ownership of the Property.

You will continue to use the property in the same way up until the property is sold.

Attempted sale of the property

During or around mid-20XX, you engaged a real estate agent, to assist with selling the Property. The Property was soon placed on the market. You, along with your family, wanted to relocate to another area.

On or around mid-to-late 20XX, a 'Contract for the Sale of Land' (the Contract) was executed to sell the Property to the Purchaser, an unrelated third party, with the sale price of $x. Settlement was scheduled to occur a couple of years later.

Pursuant to the Contract, the Purchaser was to pay the deposit of 20% (totalling $X) in two instalments.

On or around mid-to-late 20XX, the first instalment of the deposit, being $X was paid to you.

On or around mid-to-late 20XX, you paid $X to the real estate agent as commission in accordance with the agreement. The commission paid was 1.5% of the sale price of the Contract.

During or around mid-20XX, the Purchaser defaulted on paying the second instalment of the deposit, being $X.

The Contract was terminated a few weeks after this (Forfeiture Date) and you retained the first instalment of the deposit, being $X (Forfeited Deposit). You did not take legal action to recover the second instalment of the deposit or enforce the settlement of the Contract.

You currently retain full ownership of the Property.

Continued attempts to sell the property

You still wish to sell the Property. After the Forfeiture Date, you commenced discussions with a new real estate agent to sell the Property.

You estimate that the sale of the Property is likely to occur within the next 2 to 3 years.

The Property will be sold in one transaction.

In late 20XX, through your solicitors, you notified the Commissioner of the receipt of the Forfeited Deposit via a written letter.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 Division 115

Reasons for decision

Question 1

Are you eligible to claim the main residence exemption for the dwelling and adjacent land up to two hectares located at the property?

Summary

You are eligible to claim the main residence exemption for the dwelling and adjacent land up to two hectares located at the property, as you meet the requirements of section 118-110 and 118-120 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Are you eligible to apply the Capital gains tax (CGT) discount on the remaining hectares of the property, after applying the main residence exemption on up to two hectares?

Summary

You are eligible to apply the Capital gains tax (CGT) discount on the remaining hectares of the property, after applying the main residence exemption on up to two hectares, as you meet the requirements set out in Division 115 of the ITAA 1997.

Detailed reasoning

Main residence exemption

A CGT exemption is available for capital gains and losses from CGT events affecting a dwelling or an ownership interest in it if the dwelling was the main residence of the taxpayer during the taxpayer's ownership period under section 118-110 of the ITAA 1997.

The main residence exemption may be extended to adjacent land, a garage, storeroom, or other structure associated to a dwelling if the following conditions contained in section 118-120 of the ITAA 1997 are met:

•         the same CGT event happens to the land (or the taxpayer's ownership interest in it) as happens in relation to the dwelling (or the taxpayer's ownership interest in it) under subsection 118-120(1) of the ITAA 1997

•         land adjacent to a dwelling is its adjacent land to the extent that the adjacent land was used by the taxpayer primarily for private or domestic purposes in association with the dwelling under subsection 118-120(2) of the ITAA 1997; and

•         the maximum area of adjacent land covered by the exemption for the CGT event is two hectares, less the area of the land immediately under the dwelling under subsection 118-120(3) of the ITAA 1997.

If a taxpayer's land (including land on which a dwelling is situated) exceeds two hectares, the taxpayer can select which two hectares the main residence exemption applies to as outlined in Taxation Determination TD 1999/67.

Application to your situation

The Property has a land area of X hectares including the land immediately under the dwelling.

Different uses of the property

Overall, the Property is "divided" into three areas:

(a)         Residential Section - an area containing the dwelling occupied by you as your main residence and family home. This part of the land includes the curtilage and area surrounding the dwelling. It includes space where your children have played over the years, and space for private infrastructure such as septic tanks, etc, because the Property is not connected to town water. You estimate that this part of the land is approximately 2 hectares;

(b)         Business Section - an area containing the two sheds and storage space used for certain activities in connection with the Business, including via the family trust that operates from the Property. You estimate this part of the land is approximately X hectares; and

(c)         Vacant Section - an area that is vacant, which you and your family used to maintain your personal animals. The family also used the area for enjoyment and leisure. The area contains a dam and a shed. The Vacant Section has been used for storage from time to time over the years. You estimate this part of the land is approximately X hectares. No agistment or business activities have been carried out in this section of the property.

No business activities have ever been conducted on the residential section of the property.

Immediately after you acquired the property, you constructed a dwelling on the Property which was completed in or around 200X. You have occupied the dwelling as your main residence and family home since that time. Further, the dwelling has never been used for the purpose of producing any assessable income, and you will continue to use the property in the same way up until the property is sold.

As the whole Property will be sold in the one sale transaction as a future sale within the next 2 to 3 years, along with the fact that you will continue to use the property in the same way up until the property is sold, the main residence exemption will extend to the land adjacent to the dwelling which was used for private and domestic purposes, and the land it is located on, up to a total of two hectares.

We accept that in addition to the Residential Section, at least some of the Vacant Section of land was used primarily for private and domestic purposes in association with the dwelling. As the land you own (including land on which the dwelling is situated) that was used primarily for private and domestic purposes in association with the dwelling exceeds two hectares, you can select which two hectares used for that purpose, the main residence exemption applies to, as outlined in Taxation Determination TD 1999/67.

The remaining X hectares of the Property are not covered under the exemption and the general CGT provisions will apply to it.

CGT discount

Under Division 115 of the ITAA 1997 for a capital gain to be a discount capital gain the following requirements must be satisfied:

•         it is made by an individual, a trust, or a complying superannuation entity

•         a CGT event happens to an asset the entity owns

•         the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

•         the asset was acquired at least 12 months before the CGT event, and

•         the indexation method was not used to calculate the cost base.

If these conditions are met, any capital gain made on the disposal of the remaining X hectares can be reduced by applying the 50% CGT discount (as for an individual the capital gain is reduced by the discount percentage of 50%).

The CGT discount in Division 115 of the ITAA 1997 does not require a choice to be made for its application but applies automatically if its conditions are satisfied.

Application to your circumstances

As you purchased the property more than 12 months ago, and the other conditions are satisfied for a discount capital gain, you can reduce the any capital gain on the remaining X hectares of land on the property by 50% for any future sale.