Private ruling: Capital Gains Tax - Main residence
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: A1: Yes

Relevant facts and circumstances: You purchased the property at address X, in 200X. It was a house with accompanying land. You moved in the house immediately after the purchase and used it as you main residence. About one and a half years later, you demolished the house and started building two units (duplex) on the land. The house had never been left vacant or used to produce assessable income. A subdivision was required by the council for building two units, which would become unit X1 and unit X2. The construction was completed one year later. You moved into unit X2 immediately after the construction was completed and used it as you main residence. You intended to sell unit X1 but would only be able to do so when the subdivision was finalised. The subdivision was finalised in about four months after the construction being completed. The four months delay was caused by council processing issues. You managed to find a purchaser for unit X1 before the subdivision being finalised. Unit X1 was sold to the purchaser in immediately after the subdivision was finalised. You had not lived in unit X1 for any period of time. You lived in unit X2 for more than one year until it was sold in 2013. Unit X2 had never been left vacant or used to produce assessable income. You choose the land, for the period since you moved out from the house (when it was demolished) until the construction was completed, to be your main residence.

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

Reasons for decision: Summary: Section 118-110 of the ITAA 1997 provides that a taxpayer can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is their main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income. In your case, you owned and used the house at address X as your main residence from the purchase to the time it was demolished, for one and a half years. You also owned and used the unit X2 as your main residence since the construction was completed until it was sold, for over a year. Section 118-150 of ITAA 1997 states when • you acquired an ownership interest of a land where there was already a dwelling on it, • you occupied the dwelling after the acquisition, • the dwelling ceased to be occupied at a later time, and • you then built new dwelling on that land, you can choose that land to be your main residence from the time the old dwelling ceased to be occupied, given the new dwelling you built became your main residence as soon as practicable after the construction was finished, and it continued to be your main residence for at least three months. In your case, you acquired the house with the land in 200X. You moved out from the house when it was demolished and started to build unit X2 (and X1) on the land. You moved in unit X2 as soon as the construction was completed. You lived there for over a year. You choose the land to be your main residence for the period from the house was demolished to the construction was completed. Therefore you can apply the main residence exemption under section 118-110 of the ITAA 1997 to disregard any capital gain from the sale of the property at address X2. If you choose to apply the exemption, you cannot treat any other dwelling as you main residence for that period of time.

Question and answer: Can you apply the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard any capital gain from the sale of the property at address X2?