Private ruling: Capital gains tax - main residence
Date of advice: 6 August 2015
Published: August 2015
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to a full main residence exemption to disregard the capital gain made on the disposal of the dwelling? | A1: No. | Q2: Are you entitled to a partial main residence exemption to disregard the capital gain made on the disposal of the dwelling? | A2: Yes.

Relevant facts and circumstances: You and your family resided in the family's main residence (Family dwelling). You and your spouse purchased a property (the property) with a dwelling (Dwelling A) located on it after 20 September 1985. A second dwelling (Dwelling B) was built by your spouse on the property. The slab was poured in around 12 months after the property had been purchased, with the completion of Dwelling B occurring around four years after the property had been purchased. You and your spouse separated around the time the construction of Dwelling B was completed. You moved into the Dwelling B straight after the completion of the building of the dwelling. The property was subdivided around six months after you had moved into Dwelling B which resulted in: • Lot A with Dwelling A located on it; and • Lot B with Dwelling B located on it. Dwelling A was disposed of in the same income year as the subdivision had occurred. You continued to reside in Dwelling B for around twelve months until you moved into another dwelling (Dwelling C). Dwelling C has been your "Common Law" main residence from the date you moved into it until the present date. Dwelling B has not been used to earn assessable income. It has remained vacant since you moved out of it and is used occasionally by you. For the purposes of this private ruling: • A divorce settlement will occur in 20YY and as part of your divorce settlement your spouse's share in Dwelling B will be transferred into your name under a court order. The marriage breakdown roll-over will apply in accordance with Subdivision 126-A of the ITAA 1997 • You will dispose of Dwelling B during the period covered by this private ruling • You will make a capital gain on the disposal of Dwelling B; and • You did not make the absence choice under section 118-145 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-150 | Income Tax Assessment Act 1997 Section 118-178 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Subdivision 126-A

Reasons for decision: Detailed Reasoning - Capital gains tax: A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own. The most common event is CGT event A1 which happens when a person disposes of their ownership interest in a CGT asset to someone else. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. | Detailed Reasoning - Subdivision of Land: If a taxpayer subdivides a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if the taxpayer retains ownership of the subdivided blocks. Therefore, the taxpayer does not make a capital gain or a capital loss at the time of the subdivision. Taxation Determination TD 97/3 provides that the Commissioner will accept any "reasonable" method of apportioning the original cost base between the new blocks. A reasonable apportionment of the cost of the land itself can usually be achieved on an area basis if all the land is of a similar size and market value or on a relative market value basis if this is not the case. However, expenditure forming part of the cost base of the asset is not apportioned if that amount is wholly attributable to a particular asset. For example, if a dwelling existed on an original block of land before it was subdivided into two blocks, the cost of the dwelling would only be included in the cost base of the block on which the dwelling stands. Further, the cost of connecting water, gas and/or electricity to the new block would not be apportioned over both blocks, as it is "wholly attributable" to the new block. Construction expenditure for the new dwelling would form part of the cost base of the block on which it stands (section 112-25 of the ITAA 1997). If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the blocks. | Detailed Reasoning - Application to your situation: You and your spouse purchased a property with an existing dwelling located on it (Dwelling A). A new dwelling was built on the property (Dwelling B) and the property was subdivided resulting in two subdivided blocks, being: • Lot A, with the existing dwelling located on it (Dwelling A);and • Lot B, on which Dwelling B located. As a result of the subdivision, you and your spouse each have a 50% ownership interest in Lot A and Lot B. No CGT event occurred at the time of the subdivision because you and your spouse retained your ownership interest in both subdivided blocks. However, a CGT event occurred when Dwelling A had been disposed of, and will occur when Dwelling B is disposed of. The original cost base of the property must be apportioned between the subdivided blocks on a reasonable basis. Any costs arising in relation to only one subdivided block can only be included in the cost base of that block. Such as the costs to build Dwelling B are only attributable to Lot B, and the costs of Dwelling A are only attributable to Lot A. | Detailed Reasoning - Full main residence exemption: Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence. However, in order to obtain a full exemption from CGT, the dwelling must have been your main residence for the entire period you owned it, must not have been used to produce assessable income and any land on which the dwelling is situated should not be more than two hectares. For the purpose of the main residence exemption, you have an ownership interest in a dwelling from the date of settlement of the contract of purchase until the date of settlement of the contract of sale. This period is called your ownership period. If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time except in limited circumstances when moving from one main residence to another. | Detailed Reasoning - Continuing main residence status during absence: In some cases you can continue to treat a dwelling as your main residence during periods of absence. That is, for periods when you no longer reside in the dwelling. If the dwelling is not used to produce income it can be treated as your main residence indefinitely. If the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is six years. You are entitled to another period of six years each time the dwelling again becomes your main residence and then commence using it again to produce income. If you make this choice, you cannot treat any other dwelling as your main residence while you apply this section. If you own more than one dwelling, only one of them can be your main residence at any one time. | Detailed Reasoning - Moving from one main residence to another: If you acquire a new dwelling before you dispose of your old one, both dwellings are treated as your main residence for up to six months if: • The old dwelling was your main residence for a continuous period of at least three months in the 12 months before you dispose of it, • You did not use the old dwelling to produce assessment income in any part of that 12 months when it was you main residence; and • The new dwelling becomes your main residence. | Detailed Reasoning - Application to your situation: You and your spouse purchased the property on which Dwelling A was located. You and your spouse did not live in Dwelling A. A second dwelling was built on the property, Dwelling B, and you commenced residing in Dwelling B after you and your spouse had separated. The property was subdivided and as a result of the subdivision, you and your spouse each had a 50% ownership interest in both of the subdivided blocks, being Lot A, with Dwelling A located on it, and Lot B, with Dwelling B located on it. Dwelling A was disposed of in the same income year the subdivision had occurred. Your spouse will transfer their 50% ownership interest in Dwelling B to you in accordance with a court order and the marriage breakdown roll-over will apply. It is expected that your divorce is expected to be finalised in early 20YY. For CGT purposes, you are viewed as owning two interests in Dwelling B, the 50% ownership interest you acquired when the property was acquired, and the 50% interest you acquired you're your spouse. You resided in Dwelling B for around 12 months until you moved into Dwelling C, which has continued to be your main residence until the present date. Dwelling C is your "Common Law" main residence from when you moved into that property. As outlined above, if you own more than one dwelling, only one of them can be your main residence at any one time. Therefore, you chose not to make the absence choice in relation to Dwelling B for the same period of time that you are treating Dwelling C as your main residence for CGT purposes. Accordingly, you will not be able to make the absence choice in relation to Dwelling B for the period from when you moved out of Dwelling B, until the date settlement on the disposal of Dwelling B occurs. We have also considered the exemption available for when you move main residences. However, as Dwelling C has been your main residence since you moved into that dwelling, and Dwelling B will not be your main residence for three months in the 12 months prior to it being disposed of, you do not meet the conditions for the exemption for moving from one main residence to another. Therefore, the moving from one main residence to another exemption will not apply in your situation. After reviewing the application of the relevant exemptions to facts of your situation, we have determined that Dwelling B will not have been your main residence for all of your ownership period when you dispose of it in 20YY. Accordingly, you are not entitled to fully disregard the capital gain made on the disposal of Dwelling B. | Detailed Reasoning - Partial exemption on disposal of dwelling: When you are not able to fully disregard a capital gain or loss, you may be eligible to partially disregard it. To calculate your capital gain or capital loss when the dwelling was only subject to a main residence exemption for some of the period of ownership, the following formula must be used: Total capital gain X Non-main residence days Total days in your ownership Where: • Capital gain is the capital gain 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 property was not your main residence. • Your total days in your ownership period are from the acquisition date to the disposal date of the dwelling. | Detailed Reasoning - Application to your situation: In your case, while you are not entitled to a full main residence exemption on the disposal of Dwelling B, you will be entitled to a partial exemption. As outlined above, for CGT purposes you are viewed as having two ownership interests (two CGT assets) in Dwelling B, your ownership interest in the property when it was originally acquired when the property was purchased, and your 50% interest that will be transferred to you by your spouse. The capital gain made on the disposal of your ownership interests will be calculated as follows: • Original ownership interest acquired in 20XX The capital gain made on this ownership interest will be calculated using the formula above as follows: The cost base of your original interest in property will be a reasonable apportionment of the original cost base of the property. Costs relating to Dwelling A are not attributable to Lot B and therefore cannot be included in the cost base of that subdivided block. Costs relating to the building of Dwelling B should be included in the cost base of this interest. However, as your spouse was the builder of Dwelling B, any costs relating to their labour when building Dwelling B cannot be included in Dwelling B's cost base. Total days in your ownership for this interest is the period from the settlement date when the property was originally acquired until the date settlement on the disposal of Dwelling B occurs. The non-main residence days will include the period from when the property had originally been acquired until you moved into Dwelling B (Refer to the additional information below for guidance on the extension of the main residence exemption when you are constructing a dwelling on land you already own). The period from when you moved out of Dwelling B until you dispose of Dwelling B will also be included in the non-main residence days. • 50% ownership interest transferred from spouse The capital gain on the disposal of this interest in the property will be calculated using the following formula which apportions the capital gain where the dwelling was not the spouse's main residence for all of their combined periods of ownership: Capital gain Multiplied by: Number of days it was not your spouse's main residence during their ownership period Plus Number of days it was not your main residence during your ownership period Divided by: Number of days in your combined period of ownership In accordance with the marriage breakdown roll-over provisions, you are taken to have acquired your spouse's share in Dwelling B at the time it will be transferred to you. The first element of your cost base is your spouse's cost base of their interest in Dwelling B at the time of the transfer. Your cost base will also include any costs incurred by you or your spouse in transferring their interest in Dwelling B to you, such as conveyancing costs and stamp duty. General legal costs relating to the breakdown or incurred in seeking a property settlement are not included. Non-main residence days in your spouse's ownership period will be from the date the property was purchased until their interest in Dwelling B is transferred to you. Non-main residence days in your ownership period will be from the date your spouse's interest in Dwelling B is transferred to you until Dwelling B is disposed of. Total days in your combined ownership period will be from when the property had been purchased until the date Dwelling B is disposed of. | Detailed Reasoning - Further issues for you to consider: The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith. | Detailed Reasoning - Constructing a Dwelling: If you build a dwelling on vacant land, you may choose to apply the main residence exemption for the shorter period of: • Four years before the dwelling becomes the taxpayer's main residence; or • The period starting from when the taxpayer acquired their ownership interest in the land and ending when the dwelling becomes their main residence. However, the taxpayer can make this choice only if the dwelling: • Becomes their main residence as soon as practicable after the dwelling is built, repaired or renovated; and • Continues to be their main residence for at least three months. To further your understanding of this exemption, we have enclosed a copy of Taxation Determination TD 2000/16 Income tax: and capital gains tax: in what circumstances does subsection 118-150(5) of the Income Tax Assessment Act 1997 modify the start of the period in paragraph 118-150(4)(b) for which you choose under subsection 118-150(2) to apply the main residence exemption in Subdivision 118-B? The following two examples (modified from the Commissioner's views in TD 2000/16) illustrate circumstances in which the Commissioner believes the extension of time either will or will not apply. | Detailed Reasoning - Example 1:: Dwelling A is situated on land acquired by Prue. A tenant occupies dwelling A after acquisition. The land is subdivided and a separate dwelling (dwelling B) is built without demolishing dwelling A. In this situation, the Commissioner believes that subsection 118-150(5) of the ITAA 1997 will not allow an alteration to the start date for which the main residence exemption may be chosen under section 118-150 of the ITAA 1997 for dwelling B back to the time that the tenant ceased to occupy dwelling A if, for example, the tenant moved out during construction of dwelling B due to noise. Section 118-150 of the ITAA 1997 will apply to dwelling B only for the period from when the ownership interest in the land was acquired until B becomes the main residence. | Detailed Reasoning - Example 2:: Freeman acquires land with an existing dwelling and builds a separate dwelling on the land. The land is subdivided after construction commences on the new dwelling. The original dwelling is not demolished. The Commissioner believes the extension of time may be available in this situation. In conclusion, making this choice would get you a partial main residence exemption on your original interest, but no exemption on the interest transferred from your spouse.