Private ruling: Capital gains tax
Date of advice: 20 January 2020
Published: March 2020
Ruling period: Year ending 30 June 20XX to year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does CGT event A1 occur upon entering into the contract of sale for Lot B? | A1: Yes | Q2: Does CGT event B1 occur upon entering into the contract of sale for Lot B? | A2: Not Applicable | Q3: Is the full main residence exemption available to you in respect of the sale of Lot B? | A3: No | Q4: Is a partial main residence exemption available to you in respect of the sale of Lot B? | A4: Yes

Relevant facts and circumstances: You acquired a property in 19XX (the Original Property). When you acquired the Original Property, there was a dwelling on the land (the Original Dwelling) which you occupied as your main residence. The Original Dwelling was not used to produce assessable income at any time during your ownership period. Around 20XX you formed the intention to subdivide the property, demolish the Original Dwelling and construct two semi-detached dwellings on the Original Property. You were unable to fully finance the construction of the new dwellings yourself. You entered into a contract to sell half of the Original Property (Lot B) on XX/XX/XXXX. The contract provided that you were selling to the purchaser the land, being a lot on a Plan of Subdivision, upon which the purchaser would construct a dwelling. The vendor granted the purchaser (and relevant parties) a licence to enter the land at all reasonable times prior to settlement for the purpose of commencing construction of the dwelling. You and your family moved out of the Original Dwelling on XX/XX/XXXX. You did not elect any other residence as your main residence prior to the settlement of the contract for Lot B. On XX/XX/XXXX the Plan of Subdivision was granted, creating Lot A and Lot B. On XX/XX/XXXX the Original Dwelling was demolished. Construction of the new dwellings commenced on XX/XX/XXXX. The dwellings on Lot A and Lot B were to be constructed at the same time as they were semi-detached and it was a requirement of council for the subdivision. Settlement of the sale contract for lot B occurred on XX/XX/XXXX. Construction of the new dwellings on Lot A and Lot B was completed on XX/XX/XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-25 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-15 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-125 | Income Tax Assessment Act 1997 Section 118-130 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-195

Reasons for decision: Summary: The sale of Lot B triggered CGT event A1. The time of the event was the date upon which you entered into the sale contract. As the dwelling on Lot B was demolished between the contract date and the settlement date, only a partial main residence exemption is available. | Detailed Reasoning - CGT event A1 or B1: There is a special rule in the CGT provisions which provides that if more than one CGT event can apply in a particular situation, the event you use is the one that is most specific to your situation (subsection 102-25(1) of the ITAA 1997). There are two CGT events which may apply in your circumstances. These events are CGT event A1 in section 104-10 of the ITAA 1997 and CGT event B1 in section 104-15 of the ITAA 1997. CGT event A1 happens if you dispose of a CGT asset. If there is a contract for the disposal of an asset, the time of the CGT event A1 is when the contract was entered into (subsection 104-10(3) of the ITAA 1997). Where sold under contract, it is irrelevant when the change in ownership of the CGT asset actually occurs which constitutes the happening of CGT event A1. It is also irrelevant (subject to the special rules as to compulsory acquisitions) at what point of time the purchaser of the asset under a contract obtains possession of it. However, if a purchaser obtains possession before completion, the possibility of CGT event B1 happening must be considered. CGT event B1 happens if you enter into an agreement with another entity under which the right to the use and enjoyment of a CGT asset you own passes to the other entity and title in the asset will or may pass to the other entity at or before the end of the agreement (subsection 104-15(1) of the ITAA 1997). The time of the event is when the other entity first obtains the use and enjoyment of the asset (subsection 104-15(2) of the ITAA 1997). In your case, it is considered that you entered into a contract for the disposal of the relevant asset, being the proposed Lot B land, on XX/XX/XXXX. While the contract provided that the purchaser have the right to enter the property for the purpose of constructing a new dwelling, the same contract provided for the ultimate disposal of the asset, therefore CGT event A1 is the most specific event to your situation. CGT Event A1 occurred on the contract date. If CGT event B1 was the relevant event, the relevant date would still be the contract date. | Detailed Reasoning - Main Residence Exemption: 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 the full exemption, the dwelling must have been your main residence throughout your ownership period and must not have been used to produce assessable income. Your ownership period is the period on or after 20 September 1985 when you had an ownership interest in the dwelling (section 118-125 of the ITAA 1997). You have an ownership interest in a dwelling for as long as you have a legal or equitable interest in the land on which it is erected (subsection 118-130(1) of the ITAA 1997). For a dwelling where you have a contract for the happening of a CGT event (eg. where you have entered into a contract for its disposal), you have an ownership interest in it until your legal ownership of it ends (subsection 118-130(3) of the ITAA 1997. In your case, although the CGT event occurred while the dwelling was still your main residence, when the dwelling was demolished it could no longer be your main residence as the exemption attaches to the dwelling and not the land. Your ownership interest did not end until your legal ownership interest ended upon settlement of the contract for the sale of the land. Therefore as the dwelling was not your main residence throughout the entirety of your ownership period, it is not considered that you qualify for the full main residence exemption under section 118-110 of the ITAA 1997. You are able to get a partial exemption for the CGT event that happens in relation to your dwelling or your ownership interest in it if you are an individual and the dwelling was your main residence for part of your ownership period (Section 118-185(1) of the ITAA 1997). You calculate your capital gain or capital loss using the formula: CG or CL x Non-main residence days Days on your ownership period where · CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this section. · non-main residence days is the number of days in your ownership period when the dwelling was not your main residence. Although you moved out of the property on XX/XX/XXXX, you can choose to treat the Original Dwelling as your main residence until it was demolished on XX/XX/XXXX under section 118-145 of the ITAA 1997 as you had no other main residence during this time.