Private ruling: Main residence exemption
Date of advice: 19 September 2017
Published: February 2018
Ruling period: Year ending 30 June 20GG | Year ending 30 June 20HH
Date scheme commenced: 1 July 20FF

Ruling: Q1: Are you entitled to a full main residence exemption on disposal of Lot 1? | A1: Yes | Q2: Are you entitled to a full main residence exemption on disposal of Lot 2? | A2: No | Q3: Are you entitled to a partial main residence exemption on disposal of Lot 2? | A3: Yes

Relevant facts and circumstances: You bought a block of land located in 19AA (the land). You built a dwelling on the land and moved into the dwelling in late 19AA. You resided in the dwelling from 19AA until 20BB. From 20BB to 20CC, you moved interstate for work purposes and rented out the dwelling. You returned to the dwelling in 20CC and lived there until mid 20DD. In mid 20DD, the dwelling was demolished. You entered into a contract to build a new dwelling on the land, with construction of the dwelling completed in early 20EE (Lot 1). You resided in Lot 1 from 20EE to the current time. You have chosen to treat Lot 1 as your main residence throughout your ownership period. As Lot 1 and the land that adjoins it is too large for you to maintain because of your age, you intend to subdivide your land and build another dwelling on the rear subdivided block (Lot 2). You have applied for subdivision approval and it is still current, but you will need to survey the land and register the plan of subdivision. You will use the sale proceeds from the sale of Lot 1 to fund the construction of Lot 2, but may have to take out a mortgage to cover the construction costs. Plans for Lot 2 are likely to be approved by the local council in 20FF and construction would start soon after. You will place Lot 1 on the market for sale in early 20GG and enter into a contract with a purchaser for a x day settlement. You envisage settlement of the sale of Lot 1 occurring in mid 20GG and you will then move into Lot 2 in mid 20GG or as soon as practicable after the sale of Lot 1 finalised.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-140 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-150 | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Summary: As you have continued to treat Lot 1 as your main residence throughout your ownership period, you will be entitled to a full main residence exemption on the disposal or sale of Lot 1. | Detailed Reasoning - Detailed reasoning: The most common capital gains tax (CGT) event is CGT event A1, which happens if you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal, or if there is no contract, when a change of ownership occurs. CGT event A1 will occur upon the disposal of Lot 1. | 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 97/3 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. Please note - The costs of the demolition of a portion of the dwelling are solely attributable to the block of land containing Lot 1. Therefore, they do not form part of the cost base of the vacant block of land which will contain Lot 2. | Detailed Reasoning - Main residence: Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your main residence. To get the full exemption from CGT: ● the dwelling must have been your home for your entire ownership period ● you must not have used the dwelling to produce assessable income, and ● any land on which the dwelling is situated must be two hectares or less. For main residence purposes, the ownership period of a dwelling runs from when you obtain legal ownership of it until that legal ownership ends. In general, you can only have one main residence at any one time, which will be where you are living. However, 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 as outlined below. | Detailed Reasoning - Absence choice: You can continue to treat a dwelling as your main residence during periods of absence. 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. | 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. | Detailed Reasoning - Land adjacent to the dwelling: The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed 2 hectares . If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the main residence exemption extends to the adjacent land. However, if you dispose of adjacent land at a different time than when you dispose of your main residence, the exemption does not apply to the adjacent land. | Detailed Reasoning - Construction of dwelling: One of these provisions that can apply is if you build a dwelling on land you own. Generally, if you build a dwelling on land you already own, the land does not qualify for an exemption until the dwelling actually becomes your main residence. However, you can choose to treat the land as your main residence for the shorter of four years before the dwelling actually 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. You can only make this choice if the dwelling you build becomes your main residence as soon as practicable after the work is finished and it continues to be your main residence for at least three months. | Detailed Reasoning - Application to your circumstances: You can elect to treat the land as your main residence for a period of up to four years before you build on it. As you built your dwelling within four years of buying the land, your main residence period will start from the time of purchase in 19AA. Although you moved out of the dwelling between 20BB and 20CC, as you did not have another main residence during this time you can make an absence choice, and continue to treat the dwelling as your main residence even while you did not live there. Your old dwelling was demolished in 20DD, and you built a new dwelling in 20EE, which you moved into. As you built on the land within four years, you can again continue to treat the property as your main residence. The subdivision of your land will not be a CGT event. However, it will mean that you now have two separate CGT assets instead of one. Both the Lot 1 and Lot 2 will have the same date of acquisition, which will be early 19AA. Lot 1, which contains the dwelling and has been treated as your main residence for the entire ownership period, will qualify for a full main residence exemption when you dispose of it, as long as you do not have another main residence during this time. As Lot 2 will be sold separately from your main residence it will not qualify for a main residence exemption until a dwelling is built on the block, and you move in. You can apply the rule for changing residences and treat both Lot 1 and Lot 2 as your main residence for a maximum period of six months. This means that for Lot 2, for your ownership period from 19AA, until the time that you move into the new dwelling, CGT will apply (apart from the six months allowed for changing residences). | Detailed Reasoning - Partial main residence exemption: If a CGT event happens 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 are entitled to a partial exemption. You calculate your capital gain using the following formula: Capital gain x Non-main residence days Total number of days in your ownership period If you sold Lot 2 during your lifetime, you would only receive a partial main residence exemption. In your case, your non-main residence days are the number of days in your ownership period when Lot 2 was not your main residence. The ownership period commences from the date that you had an ownership interest in the land on which the house was built. That is from the time that you had a right to occupy the land (19AA) until settlement upon disposal of Lot 2. | Detailed Reasoning - Capital gain or capital loss on death: In most circumstances, a capital gain or loss that arises from a CGT event that happens to a CGT asset of a person when they die will be disregarded. A person who inherits a deceased’s estate after 20 August 1996 may disregard any capital gain or loss when a CGT event happens to the dwelling (such as selling it) if the following applies: ● Just before the deceased died it was their main residence and was not being used to produce income; and ● You dispose of your ownership interest within 2 years of the person’s death, that is, if the dwelling is sold under a contract and settlement occurs within 2 years; or ● From the deceased’s death until you dispose of your ownership interest, the dwelling is not used to produce income and is the main residence of one or more of the following: ● a person who was the spouse of the deceased immediately before the deceased’s death (but not a spouse who was permanently separated from the deceased); or ● an individual who had a right to occupy the dwelling under the deceased’s will; or ● you, as a beneficiary, if you dispose of the dwelling as a beneficiary.