Private ruling: Capital gains tax main residence
Published: September 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a full main residence exemption on your share of the capital gain or loss made on disposal of property B? | A1: No. | Q2: Are you entitled to a partial main residence exemption on your share of the capital gain or loss made on disposal of property B? | A2: Yes.

Relevant facts and circumstances: You and your spouse purchased a property post 1985 (property C). This property was purchased as joint tenants. You lived in property C for a number of years. You commenced building a house to the rear of property C. You sub-divided the land and registered the sub-division with the lands title office. The sub-division resulted in two residential blocks being property A and B. You sold property A and applied the main residence exemption to property A. You moved into property B on settlement of property A. Property B is now your main residence. You have never used property B to derive assessable income You intend on selling property B in the current financial year. You have lived in property B for X months. The land size of property B does not exceed 2 hectares.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-150 | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Summary: A capital gain or loss may be made when a CGT event happens to a CGT asset. Real estate acquired after 19 September 1985 is a CGT asset. The most common CGT event is CGT event A1 and this occurs when an entity disposes of the ownership interest in an asset. The sale of a dwelling and land would be considered to be a CGT event A1. | Detailed Reasoning - Subdivision of land: Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title. The acquisition date of the subdivided block will be your original purchase date. However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis. Taxation Determination TD 1997/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis. | Detailed Reasoning - Capital gains tax and main residence provisions: Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your main residence. For main residence exemptions to apply to the disposal of land the land must have a dwelling on it and they must be disposed of simultaneously. Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) directs that you can disregard a capital gain or capital loss made on the sale of a dwelling and land that is your main residence (your home) if:- · the dwelling was your home for the whole period you owned it, · the dwelling was not used to produce assessable income, and · any land on which the dwelling is situated on and adjacent to is not more than two hectares. In general, you can only have one main residence at any given time. One exception to this is when you are changing main residences, i.e. moving homes. For the main residence purposes, the ownership period of a residential property runs from when you obtain legal ownership of it until that legal ownership ends. There are a number of main residence provisions that can treat a residential property as your main residence at a time when you are not actually living there. | Detailed Reasoning - Changing main residences: The changing of main residences provision treats both properties as your main residence for a maximum period of six months. If the period that you own both properties exceeds six months, you treat the new property as your main residence for the last six months that you also owned the former property. Section 118-150 of the ITAA 1997 applies to land in which you have an ownership interest and on which you build a dwelling. The section allows you to choose to apply the main residence exemption as if the dwelling you are building was your main residence from the time you acquired the ownership interest in the land. However, this choice can only operate for the shorter of: · 4 years before the dwelling becomes your main residence; or · the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence. Taxation determination TD 2000/13 (TD 2000/13) discusses the application of the CGT provisions where you sell dwelling A prior to moving into dwelling B and establishing it as your main residence, and states that a full main residence exemption is not available on both dwellings. TD 2000/13 outlines the following circumstance: · You acquire land and a dwelling on or after 20 September 1985 which you use as your main residence and do not use for income producing purposes and; · You subdivide the land into 2 blocks and build another dwelling (dwelling B) on the subdivided vacant land and this dwelling becomes your main residence; and · You choose not to apply section 118-150 of the ITAA 1997 (about building, repairing or renovating a dwelling) for dwelling B; and · You sell dwellings A and B. In your circumstances, you did not elect to treat property B as your main residence under section 118-150 of the ITAA 1997 before you moved into it. By making this election this entitles you to the full main residence exemption on the disposal of Property A for your entire ownership period. You have already sold Property A and you treated it as your main residence for the whole of your ownership period and received the main residence exemption. However, you will only be entitled to a partial main residence exemption on the disposal of property B, even taking into consideration the six months when you changed main residences. You will not qualify for the main residence exemption for the period starting from when you acquired the land to the time you moved into property B. | Detailed Reasoning - Partial Main Residence Exemption: Section 118-185 of the ITAA 1997 directs that when a CGT event happens in relation to a dwelling you acquired on or after 20 September 1985, and that dwelling was not your main residence for the whole time you owned it, you only get a partial exemption To calculate your capital gain or capital loss on the property the following formula must be used: Capital gain (or capital loss) x non-main residence days Total days in ownership period Where: · Capital gain or capital loss is the capital gain or capital loss you would have made from the CGT event if the main residence exemption had not applied · Non-main residence days are the number of days in your ownership period when the dwelling was not your main residence. · Total days in your ownership period is from the date you acquire your ownership interest, until you dispose of the property.