1 Does Dwelling B meet the conditions for an adjacent structure in section 118-120 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 No Question 2 Will you receive a full main residence exemption on disposal of Dwelling A? Answer 2 No Question 3 Will you receive a partial main residence exemption on disposal of Dwelling A? Answer 3 Yes Question 4 Will you receive any main residence exemption on disposal of Dwelling B? Answer 4 No This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
On Date one, you purchased a property consisting of land and a Dwelling (Dwelling A) (Property A). On Date 2, you moved into Property A with your spouse, On Date 3, you sold your property (Property B) and claimed the main residence exemption. Prior to moving into Property A, you had resided at Property B until on or around Date 4. At about that time, you began using the property to earn assessable income. You exercised the absence choice for the period after you moved out of Property B until the time of its disposal. On Date 5, you moved out of Property A and began using it to earn assessable income. In 20XX, you built a granny flat (Dwelling B) at Property A. Dwelling B has several bedrooms, a kitchen, a bathroom, a combined living and dining area and a separate entrance and separate garage to Dwelling A. You originally intended to keep Property A including Dwelling B. However, the circumstances of your situation meant that you decided to sell the property. Dwelling B is on the same title as the dwelling at Property A. Dwelling B was never occupied or used to earn assessable income. You used it for temporary storage of some items.
There is a fence that separates Dwelling A and Dwelling B. When Dwelling A was rented the tenants only had access to the fenced area around Dwelling A. You sold Property A on Date 6. At the time of sale, Dwelling A on Property A was being used to earn assessable income. The tenants did not have use of Dwelling B.
Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 108-25 Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 118-120 Income Tax Assessment Act 1997 section 118-125 Income Tax Assessment Act 1997 section 118-140 Income Tax Assessment Act 1997 section 118-145 Income Tax Assessment Act 1997 section 118-185
Question 1 Summary Dwelling B does not meet the conditions for an adjacent structure in section 118-120 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning Section 104-10 of the ITAA 1997 provides that capital gains tax (CGT) event A1 happens when you dispose of a CGT asset. Section 108-5 of the ITAA 1997 confirms that CGT assets include any kind of property. Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if: (a) You are an individual; and (b) The dwelling was your main residence throughout your ownership period; and (c) The interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of the deceased person. This is commonly referred to as the main residence exemption. Generally, only one dwelling can be treated as your main residence at any one time.
Section 118-120 of the ITAA 1997 extends the main residence exemption available under section 118-110 to a dwelling's adjacent land up to 2 hectares in area. The exemption is extended provided that the adjacent land is used primarily for private or domestic purposes in association with the dwelling. Subsection 118-120(5) also applies the main residence exemption to an adjacent structure of a flat or home unit (if the same CGT event happens to that structure or your ownership interest in it) as if it were a dwelling. Where a dwelling is a flat or home unit, the main residence exemption will apply to a garage, storeroom or "other structure" associated with a flat or home unit (subsection 118-120(6) of the ITAA 1997) Examples of other structures in addition to garages and storerooms that could qualify for the exemption include a separate laundry or a workshop. Under the rules of statutory interpretation, the phrase "other structures" should be considered in the context of structures similar to garages, storerooms, etc.
Section 118-120 of the ITAA 1997 extends the main residence exemption available under section 118-110 to a dwelling's adjacent land up to 2 hectares in area. The exemption is extended provided that the adjacent land is used primarily for private or domestic purposes in association with the dwelling. Application to your circumstances We do not consider that Dwelling B is a structure as described in subsection 118-120(6) of the ITAA 1997. As outlined above, 'other structures' refers to structures such as garages, storerooms and sheds. Even if Dwelling B did meet the requirements to be considered a structure, it was never used primarily for private or domestic purposes in association with Dwelling A. You used Dwelling B to store some of your family's items there, but this use was in respect of your ownership of it, and not with respect to the use of Dwelling A. Once Dwelling B was constructed, Dwelling A was already being rented out and the tenants did not have access to Dwelling B on its completion. As Dwelling B is not considered an adjacent structure, you cannot extend the main residence exemption to include Dwelling B on disposal of the Property. Question 2 Summary
You will not receive a full main residence exemption on disposal of Dwelling A. Detailed reasoning As Dwelling B is not considered an adjacent structure for the purposes of the main residence exemption, we need to consider whether Dwelling A and Dwelling B can be considered one unit of accommodation. If they aren't considered one unit of accommodation, any capital gain or loss for Dwelling A and Dwelling B needs to be calculated separately. As outlined in Question 1, you generally only receive a main residence exemption for one dwelling at a time with limited exceptions. Subsection 118-115(1) of the ITAA 1997 provides that a dwelling includes: a) a unit of accommodation that: i. is a building or is contained in a building; and ii. consists wholly or mainly of residential accommodation; b) a unit of accommodation that is a caravan, houseboat or other mobile home; and c) any land immediately under the unit of accommodation. In some instances, two dwellings can be considered one unit of accommodation. 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? (TD 1999/69) confirms that the term 'dwelling' as defined in section 118-115 of the ITAA 1997 can include more than one unit of accommodation where the units of accommodation are used together as one place of residence or abode. TD 1999/69 outlines factors that may indicate that has occurred. These factors include: a) whether the occupants sleep at 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 the costs of the units are shared by the occupants. 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.
Subsection 118-145 (1) of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. This is sometimes referred to as 'the absence choice'. Subsection 118-145(2) of the ITAA 1997 provides that if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. Section 118-185 of the ITAA 1997 provides that you only get a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if the dwelling was your main residence for only part of your ownership period. Application to your circumstances
Dwelling B was not constructed by the time you moved out of Dwelling A. You never occupied Dwelling B and therefore it cannot be considered to have been used in association with Dwelling A. The main residence exemption cannot be extended to include Dwelling A and Dwelling B on disposal of the Property. Therefore, you need to calculate any capital gain or loss on disposal of Property A separately for Dwelling A and Dwelling B. You moved into Dwelling A on Date 2.However, for the purposes of section 118-145, you continued to treat Property B as your main residence until Date 3. On disposal of Property B, you disregarded any capital gain or loss using the main residence exemption. To receive a full main residence exemption, you exercised the absence choice for the period from Date 2 when you moved out of Property B to Date 3 when you sold Property B. As you received a full main residence exemption on disposal of Property B, you won't receive a full main residence exemption for the disposal of Dwelling A on Property A.
As you used Property B to earn income in the 12 months prior to its disposal, section 118-140 of the ITAA 1997 will not apply in this situation to extend the main residence exemption. Question 3 Summary You will receive a partial main residence exemption on disposal of Dwelling A. Detailed reasoning As outlined in Question 2, you only get a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if the dwelling was your main residence for only part of your ownership period. Section 118-125 confirms that your ownership period of a dwelling is the period on or after 20 September 1985 when you had an * ownership interest in: (a) the dwelling; or (b) land ( * acquired on or after 20 September 1985) on which the dwelling is later built. Section 118-185 of the ITAA 1997 provides that you calculate your capital gain or capital loss using the formula: CG or CL amount x Days in your ownership period Application to your circumstances
You will receive a partial main residence exemption for Dwelling A. When calculating the partial main residence exemption, the days where you exercised the absence choice for Property B will also be considered non main-residence days. As outlined in section 118-120 of the ITAA 1997, the exemption extends to a dwelling's adjacent land up to 2 hectares in area. Question 4 Summary You are not eligible for any main residence exemption on disposal of Dwelling B. Detailed reasoning As outlined in Question 2, to be eligible for any main residence exemption on disposal, a dwelling must have been your main residence for at least some of your ownership period. Your ownership interest commences when you acquire an ownership interest in land on or after 20 September 1985 on which the dwelling is built. As also outlined previously, you can generally only receive a main residence exemption for one dwelling. In some instances, two dwellings can be considered one unit of accommodation and the main residence exemption can be extended to include adjacent structures. Application to your circumstances
Your ownership interest in Dwelling B commenced when you acquired Property A on which the dwelling was built. Dwelling B on Property A is a dwelling as per the definition in section 118-115 of the ITAA 1997. The dwelling was never used in connection with Dwelling A so can't be considered one unit of accommodation for the purposes of the main residence exemption. In addition, Dwelling B does not meet the definition of a structure for the purposes of section 118-120 of the ITAA 1997. Therefore, you can't include Dwelling B as an adjacent structure for the purposes of the main residence exemption on disposal of Property B. As you never used Dwelling B as your main residence in connection with Dwelling A and Dwelling B is not an adjacent structure for the purposes of section 118-120 of the ITAA 1997, you are not eligible for any main residence exemption on disposal of Dwelling B. Therefore, the normal capital gains tax provisions will apply on disposal. The cost of constructing Dwelling B can be added to the cost base when calculating any capital gain or loss that relates to the land not associated with Dwelling A and the main residence exemption. Extra information
Taxation Determination TD 1999/67 Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land ? provides information about how to calculate any capital gain or capital loss you make on land you dispose of that is not subject to the main residence exemption. Paragraph 3 of TD 1999/67 provides that if your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base on the basis of the valuation. In your circumstances, where Dwelling B is fenced off from Dwelling A, a reasonable area basis may be the area of land that is inside the fenced area associated with Dwelling B.
Paragraph 4 provides that if your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base on an area basis. The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable