Edited version of private advice

Authorisation Number: 1052328441865

Date of advice: 13 November 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Is the parcel of land, known as Lot A and Lot B as recognised by the relevant state government agencies, regarded as your principal place of residence as at the date of the sale of Lot A to the State Government?

Answer

No, for the purposes of capital gains tax (CGT), under section 118-165 of the Income Tax Assessment Act 1997 (ITAA 1997), if adjacent land (or structures) is disposed of separately from the dwelling, the main residence exemption will not apply to any capital gains or losses arising from the CGT event affecting the adjacent land (or structure).

Question 2

Is the sale of Lot A subject to capital gains tax?

Answer

Yes. Lots A and B were disposed of at separate CGT events, the main residence exemption will not apply to any capital gains or losses arising from the sale of Lot A. You will however be entitled to claim a 50% discount on any capital gain because the acquisition date of Lot A is more than 12 months prior to the date of disposal.

Question 3

If the sale of Lot Ais subject to CGT, do you calculate the capital gain or loss from the date when Lot 20 ceased to be your main residence through to the sale of Lot A?

Answer

No, each lot has its own cost base. The cost base is made up of five elements, with the first element being the amount you paid in relation to the acquisition of the asset. Lot A was acquired in 20XX and disposed of in 20XX. As noted at Question 2, you will be entitled to claim a 50% discount on any capital gain because the acquisition date is more than 12 months prior to the date of disposal.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You were the owner of 2 adjacent blocks:

•         You purchased Lot B in 20XX. Lot B is X square metres and contained the main structure (the dwelling).

•         You purchased Lot A in 20XX. Lot A is X square metres and is vacant land. Lot A was the primary means of access (driveway) to Lot B.

You advised us that you moved into the property in 20XX.You lived there for a number of years and subsequently moved out for a number of years. The Property was rented during this time.

In 20XX, you moved back into the property and treated this as your main residence from 20XX to the flooding event which occurred in Month 20XX.

On DD MM 20XX, you received a combined land valuation from the State Government for combined lots A and B for X. You have provided this to us. You state X City Councill issued rates notice on or around the same date as the land valuation which indicated a valuation of $X for Lot A and $ X for Lot B.

A State disaster event occurred in MM 20XX, and your property was deemed uninhabitable. You were required to find alternative accommodation.

As a result of the flooding event, The Voluntary buyback program, administered by the relevant State Authority, was considered for homes that were the most severely impacted and at the greatest risk of future disaster events.

On or around DD MM 20XX, you received a letter of offer from X City Council with the following details: You have provided us a copy of this letter:

•         Thank you for your interest in the X Fund, jointly funded by the Commonwealth and State Governments under the X Arrangements.

•         I am pleased to advise that your property (Lot B) has been assessed as eligible to participate in the Voluntary buyback program.

•         The offer to purchase your property under the program is the higher of the following two figures:

•         $X (being the pre-flood valuation of the property specified in the Valuation Report) minus any insurance benefit you receive for the flood damage to the property; and

•         $1X (being the current as-is value of the property specified in the Valuation

You have the following three (3) options in relation to the Program:

•         Accept the offer and proceed to sell your property to X City Council.

•         Reject the offer and withdraw from the Program.

•         Reject the offer and organise your own independent valuation assessment and submit it to us for consideration (within the 30-day period).

You accepted the offer made by the X City Council to purchase Lot B and thereby to participate in the voluntary program.

Lot B was sold for $X to X City Council under the voluntary buyback program with settlement occurring in MM 20XX.

Lot A was not purchased by the X City Council as part of the voluntary buyback program. You stated that the State Government declined to buy back lot A based on their buy back policy.

On or around DD MM 20XX, you received a land valuation from the State Government for Lot A for $X.

On DD MM 20XX, you sold Lot A for $X at auction.

Contentions

For more than X years you have regarded the property (the combined lots of A and B) as your principal place of residence as a single parcel of land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10(6)

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 118-165

Income Tax Assessment Act 1997 Section 118-250

Income Tax Assessment Act 1997 Section 124-70(1)(c)

Reasons for decision

Compulsory acquisition

Subdivision 124 B of the ITAA 1997 provides roll-over relief for a capital gain (but not loss) made on the compulsory acquisition, loss or destruction of an asset (or part of an asset). The consequences of the roll-over vary depending upon whether an asset, money or a combination of both is received as compensation.

The roll-over applies to the following types of compulsory acquisitions (section 124-70)

•         a CGT asset is compulsorily acquired by the Commonwealth, a State or Territory or an authority of the Commonwealth, a State or Territory (eg a local government body).

•         a CGT asset is acquired by a non-government entity under a power of compulsory acquisition under an Australian or foreign law, other than a law for the compulsory acquisition of minority interests;

•         a CGT asset is disposed of to an entity (other than to a foreign government agency) after a notice was served by or on behalf of the entity inviting negotiations with a view to the entity acquiring the asset by agreement (but the notice must inform the recipient that if the negotiations are unsuccessful, the asset will be compulsorily acquired by the entity under a power of compulsory acquisition conferred by an Australian or foreign law, other than a law for the compulsory acquisition of minority interests).

•         land (and any depreciating asset fixed to the land), which is or would be subject to a mining lease, is disposed of to the lessee (other than a foreign government agency), provided the lease is in force just before the disposal.

The asset must be taxable Australian property just before its compulsory acquisition, and any replacement asset must be taxable Australian property after it is acquired.

Main residence and the extension of main residence exemption to adjacent land

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 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.

Taxation Determination (TD 1999/68) Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling? (TD 1999/68) at paragraph 7 outlines what is 'adjacent' land for the purposes of the main residence exemption and states:

•         The main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it: see section 118-165. If you dispose of adjacent land to the same person and at the same time as you dispose of your main residence, the exemption extends to the adjacent land. It does not extend to adjacent land, however, if you dispose of the land separately from the main residence, e.g., you dispose of the adjacent land to the same purchaser but at a different time from when you dispose of the main residence or you dispose of the adjacent land and the main residence to different purchasers even if the disposals happen at the same time'.

•         the adjacent land and the main residence to different purchasers even if the disposals happen at the same time'.

Application to your circumstances

Question 1 - combined lots as your principal place of residence as at the date of sale of Lot B

In your situation, Lot B (containing the main dwelling) was sold under a voluntary buyback program to the X City Council in 20XX. Lot A (adjacent land) was sold at auction in MM 20XX.

Lot A was sold at auction in MM 20XX at a separate CGT event to the disposal of Lot B.Therefore, for the purposes of capital gains tax (CGT), under section 118-165 of the ITAA 1997, the extension of main residence exemption will not apply to the disposal of Lot A.

Note: Lot B was not disposed of under a power of compulsory acquisition. Therefore, based on the information provided we consider that the conditions for compulsory acquisition contained in paragraph 124-70(1)(c) of the ITAA 1997 have not been met and therefore, the replacement asset rollover under section 124-70 of the ITAA 1997 is not available in relation to the disposal.

Question 2 - The sale of Lot A

As noted above, Lot A was sold as vacant land at auction in MM 20XX. Therefore, you are not eligible for the extension of the main residence exemption to adjacent land under section 118-120 of Income Tax Assessment Act 1997. As no exemption applies here, the sale of Lot A is subject to capital gains tax.You will be entitled to claim a 50% discount on any capital gain because the acquisition date is more than 12 months prior to the date of disposal.

Question 3 Cost base of Lot A

In your case, each lot has its own cost base. Lot B was acquired in 20XX and disposed of in 20XX. Lot A was acquired in 20XX and disposed of in 20XX. The cost base is made up of five elements, with the first element being the amount you paid in relation to the acquisition of the asset. As noted at Question 2, you will be entitled to claim a 50% discount on any capital gain because the acquisition date is more than 12 months prior to the date of disposal.