Edited version of private advice

Authorisation Number: 1052368332401

Date of advice: 26 March 2025

Ruling

Subject: Main residence exemption

Question 1

Can you apply the main residence exemption to the sale of your second property?

Answer 1

No.

Relevant facts and circumstances

You own a home which is your main residence (property A).

You also own a second property (property B).

Property B has been sold, with settlement of the property occurring during the ruling period.

You have not sold, and are not selling property A.

The distance between property A and property B is X Km.

There is residential housing between property A and property B.

The area covered by property A and property B is XXXm2 and XXXm2 respectively. You and your spouse helped maintain the property, by mowing and looking after any issues that arose.

Property B was purchased for your child (XXXXX) to live in as there was no room at property A to build a separate dwelling.

Your child lived in property B on a full-time basis, for part of the period you owned it.

You had a written rental agreement with your child to rent property B.

Your child lived alone. They paid electricity, internet, and water when they could manage it. You paid any outstanding utility bills while they lived there.

Your child paid rent of $XXXX per week.

For the remainder of the period you owned property B it was rented to an couple.

They paid rent of $XXXX/week.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 subsection 118-120(5)

Income Tax Assessment Act 1997 section 118-165

Reasons for decision

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made when a CGT event happens to a CGT asset you own.

Subdivision 118-B of the ITAA 1997 deals with the main residence exemption from CGT. Generally, when you sell your main residence, section 118-110 of the ITAA 1997 provides that you will be entitled to a full main residence exemption if:

•                     you are an individual.

•                     the dwelling was your main residence throughout your ownership period.

•                     the property was not used to produce assessable income, and.

•                     any land on which the dwelling is situated is not more than 2 hectares.

Section 118-120 of the ITAA 1997 extends the main residence exemption to include land which is adjacent to your main residence provided it is used primarily for private or domestic purposes in association with the dwelling, and the same CGT event happens to the land and the dwelling. Subsection 118-120(5) of the ITAA 1997 provides that this may extend to an adjacent structure of a flat or home unit as if it were a dwelling. Land is adjacent to your dwelling if it is close to, near, adjoining or neighbouring the dwelling (Mayor of Wellington v. Mayor of Lower Hutt [1904] AC 773 at 775-776).

However, section 118-165 of the ITAA 1997 provides that the exemption cannot apply to adjacent land and structures unless the CGT event which happens to the adjacent land and structures also happens to the dwelling which is eligible for the main residence exemption.

Taxation Determination TD 1999/68 explains the limitation imposed by section 118-165 of the ITAA 1997 at paragraph 7:

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 of the ITAA 1997. '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 extension of the main residence exemption provided under section 118-120 of the ITAA 1997 can therefore only be considered in relation to adjacent land and structures which are disposed of to the same person at the same time as the dwelling to which the main residence exemption applies.

Application to your circumstance

In your situation, property B has been sold whilst retaining your main residence, property A. As no CGT event has happened to your main residence the operation of section 118-165 of the ITAA 1997 prevents the main residence exemption from being extended to property B.

As such, the normal CGT provisions will apply to the sale of the property.

Further considerations

This ruling has not addressed the issue of whether property B could be regarded as adjacent land and structures under the requirements listed in section 118-120 of the ITAA 1997. It is highly unlikely that it could be regarded as such, on the basis that it is an entirely independent residential property from property A, and you have rented out property B for the duration you owned it.