Edited version of private advice

Authorisation Number: 1052312838083

Date of advice: 22 October 2024

Ruling

Subject: CGT event A1 - adjacent land - cost base

Question 1

Will the capital gain or loss made on the disposal of the land be disregarded pursuant to section 118-195 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer 1

No.

Question 2

If capital gains tax ('CGT') does apply to the disposal of the land, is the first element of the cost base the market value of the asset on the day the deceased died pursuant to section 128-15 of the ITAA 1997?

Answer 2

Yes.

Pursuant to section 128-15, the first element of the assets cost base for a CGT asset acquired before 20 September 1985 is the market value of the asset on the day the deceased died.

This private ruling applies for the following period:

Year ending XX June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased was an Australian resident for taxation purposes.

The deceased purchased the land pre-CGT.

There was a structure on the land, however it was unhabitable.

The deceased made no improvements or additions to the land throughout their ownership period and would visit the land merely to maintain it.

The land was not used to produce assessable income at any point during the deceased's ownership period.

The deceased died intestate on XX XXX 20XX.

Letters of Administration were issued to the deceased's children.

In addition to the land, the deceased owned a main residence, which was their main residence until the date of their death.

The land was sold in XXX 20XX and the contract settled in XXX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Summary

Any capital gain or loss resulting from the sale of the land will not be disregarded as there was no dwelling on the land and is not considered adjacent land for the purposes of section 118-120 of the ITAA 1997.

Detailed reasoning

The main residence exemption in section 118-110 of the ITAA 1997 applies to disregard a capital gain or capital loss a taxpayer makes from a CGT event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•                     They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate and

•                     The deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death, and was not then being used for the purpose of producing assessable income and

•                     Their ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner.

Section 118-120 of the ITAA 1997 extends the definition of dwelling to adjacent land up to a maximum of 2 hectares. Subsection 118-120(2) provides that land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. The maximum area of adjacent land covered by the main residence exemption is 2 hectares, less the area of land immediately under the dwelling (subsection 118-120(3) of the ITAA 1997).

'Adjacent' is not a word to which a precise and uniform meaning is attached by ordinary usage. It is not confined to places adjoining, and it includes places close to or near. What degree of proximity would justify the application of the word is entirely a question of circumstances...' (Mayor of Wellington v. Mayor of Lower Hutt [1904] AC 773 at 775-776). The Macquarie Dictionary defines 'adjacent' as 'lying near, close or contiguous; adjoining; neighbouring'.

The further the distance between the relevant land and the land on which your dwelling is situated the less likely it is that the relevant land is 'adjacent' land in terms of section 118-120. This is so not only because the word 'adjacent' has its limits but also because it is less likely that the land could be used primarily for private or domestic purposes in association with your dwelling.

Taxation Determination ('TD') 2000/15 states that the extent to which the land has been used for private or domestic purposes is also a relevant factor for consideration. It notes that the 'primary' use of the land for private or domestic purposes is association with the dwelling is a question of fact and degree. Example 2 in TD 1999/68 supports this statement:

Bob and Lyn own a house in a country town. Lyn owns a horse which she rides in local horse competitions. There is no room for the horse in the backyard of the house, so Bob and Lyn bought a block of land some two street blocks away on which to run the horse. The total area of the land on which the house is situated and the horse yard is less than 2 hectares. The horse yard, which is used by Lyn primarily for private or domestic purposes in association with her house, is considered to be adjacent land for the purposes of section 118-120.

Application to your circumstances

The deceased purchased a property containing a dwelling that they used as their main residence, and a block of land. Although the term 'adjacent' does not require the properties to be directly next to each other under the operation of section 118-120, the distance between the main residence and the land is such that they cannot be considered to be adjacent to one another. In addition, the deceased did not use the land throughout their ownership period apart from to visit for the purpose of mowing the grass. To that end, the extension of the main residence exemption does not apply to the land.

You are entitled to the 50% CGT discount in relation to the Property.