Edited version of private advice

Authorisation Number: 1052370693919

Date of advice: 07 May 2025

Ruling

Subject: Main residence exemption

Question 1

Can you claim the main residence exemption on disposal of unit B?

Answer 1

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

In 19XX, you and your spouse purchased a unit off the plan: unit A. The property was owned as joint tenants.

In 19XX, unit A was completed and the purchase settled.

On completion of unit A, you and your spouse moved into the property, and it became your sole place of residence.

In 20XX, you and your spouse purchased the adjoining unit B. The property was owned as joint tenants.

Unit B was purchased with the sole purpose of joining the two units to form one place of residence.

During the period of ownership, unit B was used and occupied as intended as your place of residence.

Unit A and unit B are on separate legal titles.

Separate utility accounts were received for water, electricity and body corporate. Owing to the fact that the strata units were on separate titles, combined utility accounts could not be issued as one unit.

One insurance policy was maintained for contents insurance. Building insurance is held by the Body Corporate.

Your reasons for wanting to combine the two units

Having moved from your previous home which had significantly more living space than unit A, it was always the intention of you and your spouse to purchase the adjacent unit B if it became available, and you and your spouse asked the owners of unit B if they could have first right of refusal to purchase if the owners considered selling.

The reasons for wanting to combine the two units to one residence were:

•                There was an age difference between you and your spouse and you both wanted to be in a position to facilitate a live-in carer for your spouse, if the need ever arose sometime in the future.

•                The one unit was not conducive to having relatives staying overnight.

•                Combining the two units into one enabled you and your spouse to have your relatives stay overnight, and to have separate facilities, if required, which would have been the case in a larger home.

•                In your previous home, and as part of the conduct of your business, you and your spouse used to provide accommodation to visiting overseas and interstate business clients from time-to-time, and some of those clients became friends. Even after the sale of your business, some of these overseas and interstate friends would call-in and visit sometimes.

The combined units provided for separate living and dining areas, bedrooms and increased outdoor areas, as would a larger home, enabling you and your spouse the use and benefits of a larger home, the use of a study, and to receive and accommodate family and friends. When alone, and as the units faced opposite outlooks, you and your spouse would, for instance, utilise the verandah and facilities of whichever area provided the more conducive and comfortable prevailing weather (particularly given the height of the building), would sometimes spend the day in one area and the night in another, etc. - the same as with a normal, less-confined house.

Some furniture was purchased to furnish unit B. As noted, living spaces were furnished consisting of a dining table and chairs, sideboards and a lounge was purchased. Additionally, new bedroom sets were also purchased. These were delivered direct to the property. Personal belongings and "touches" such as pictures, photographs and home décor were also moved between the combined units A and B.

You and your spouse were the sole resident occupants at all times. No family members occupied the premises during ownership, other than for occasional visits.

As noted above, occasionally family and friends (particularly overseas and interstate) would stay when visiting, however no visitors stayed for more than a week.

Combining the two units

In mid-20XX, on settlement of unit B, works were undertaken to demolish the adjoining walls and merge the two units into one large unit.

The Body Corporate approved the removal of the wall and renovations to merge the two units, and subsequent approval was also granted for the removal of the original front door of unit B, such that there was only one entrance to the residence. You and the Body Corporate have been unable to locate the committee approval for the initial work undertaken. However, a copy of the approval for the removal of the front door by the Body Corporate dated XX XXXX 20XX has been provided.

A temporary wall was erected during the renovations, so you and your spouse were able to continue to reside in the property.

The following works were undertaken:

•                The bedroom wall dividing the two units was removed, and a study room was created.

•                To create a hallway, the bathroom of unit A was reconfigured and renovated.

•                Due to a variation of flooring between the two units, the flooring of unit A was also updated to match.

You have provided copies of the before and after floor plan of the units, a summary of the scope of the works to be undertaken and progress invoices.

You also confirm that the building entity provided the invoices for all materials purchased and sub-contractors, however, due to the volume of documents, these have not been included.

Separating the two units

On XX XXXX 20XX, your spouse passed away.

Your spouse's ownership interests in units A and B were transferred to you.

From XXXX to XXXX 20XX, works were undertaken to reinstate the adjoining walls between units A and B. You have supplied details of the works undertaken to reinstate the adjoining wall and reinstall the front door for unit B. Also included is a copy of the notice from the Body Corporate to confirm the works had been undertaken and completed to their satisfaction.

You have always remained living in the premises.

Selling unit B

You chose to sell only one unit as you made the decision to downsize but wished to remain in the building. Being aged, and now living alone, the building is safe and secure, entry to the building is monitored and access to the unit floor level is secured. During your property search there were no other comparable properties for sale in the building or in the surrounding area.

In XXXX 20XX, unit B was sold.

In XXXX 20XX, the sale of unit B was settled.

You continue to occupy unit A as your sole place of residence.

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 118-115

Reasons for decision

Summary

You are entitled to claim a partial main residence exemption on disposal of unit B.

Detailed reasoning

Under section 118-110 of the Income tax Assessment Act 1997 (ITAA 1997) you can generally disregard a capital gain or capital loss you make from the disposal of a dwelling that qualifies as your main residence when the dwelling was your main residence for the whole period you owned it, and your interest in the dwelling did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Also, under section 118-120 of the ITAA 1997, to get the full exemption from CGT any land on which the dwelling is situated must be two hectares or less.

Generally, access to the exemption is based on the common law definition of main residence. This definition may be extended or limited by other provisions in Subdivision 118-B of the ITAA 1997.

A dwelling includes a unit of accommodation that is a building or is contained in a building and consists wholly or mainly of residential accommodation (section 118-115 of the ITAA 1997).

Whether two or more units of accommodation are used together as one place of residence or abode for the purposes of the definition of dwelling is a question of fact that depends on the particular circumstances of each case.

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? outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. These include:

(a)           whether the occupants sleep, eat and live in them;

(b)           the distance between and the proximity of the units of accommodation;

(c)            whether the units are connected;

(d)           whether the units are capable of being sold separately;

(e)           the extent to which the daily activities of the occupants in the units are integrated;

(f)             how the units are shared by the occupants; and

(g)           how costs of the units are shared by the occupants.

Application to your situation

Looking at the relevant factors set out in TD 1999/69, unit B will be exempt from CGT under the main residence rules because the two units together were your main residence.

You and your spouse purchased and lived in unit A as your main residence. Later, you purchased the adjacent unit B with the sole purpose of occupying it as your main residence; it was never used for income producing purposes.

The adjoining walls between units A and B were demolished, merging the two dwellings into one large unit. The separate front door for unit B was removed. Both units held your personal belongings such as furniture, pictures, photographs and home decor. The merged units were occupied as one place of residence. While joined together, the units could not be sold separately. Both units were owned and occupied by you and your late spouse and, subsequently by you solely, as your main residence. Therefore, unit B will be exempt from CGT under the main residence rules as it was part of your main residence.