February 11, 2016

When Can a Shed be a Residence?

Mark Hann, Director

Commentary: This is the case of a taxpayer who bought and sold land for a profit. She personally went before the Administrative Appeal Tribunal (AAT) and

  • Was able to obtain the CGT principal residence exemption on a shed;
  • Narrowly missed out on almost a full CGT exemption; and
  • Was able to have the cost base of the property increased on estimated costs.

The Facts

Basically, the taxpayer purchased a vacant block of land on 31 July 1996 for $166,000 and in June 2002, entered into a contract with a builder to erect a dwelling on the land.

In September 2002, the building contract was terminated, but, in the meantime, the builder had erected a two room shed on the property which had been built as a storage and lunch room.

Even though there was no electricity or gas and she had to use candles for light, the taxpayer moved into the two room shed for approximately four months from January 2003.

In June 2004, it was sold for $380,000.

Apparently, such accommodation was not unusual for the taxpayer who was in the habit of showering at work every day. The AAT accepted her evidence that it had been her residence for four months.

Tax Planning Opportunity

Had she moved into the shed immediately after it had been completed, under the CGT provisions, she would have been able to treat it as her residence for the four years previous.

However, she waited 4 months after the shed was completed before moving in and unfortunately lost the main residence exemption.

This unusual case highlights the need to seek advice from your accountant when entering into significant transactions (particularly where CGT exemptions are concerned) as you never know what tax planning opportunities may arise.

Please Note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

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