Private ruling: Main residence exemption
Published: March 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the cost base of the entire property the market value at the date of death of your relative? | A1: No, refer to reasons for decision. | Q2: Are you entitled to a full main residence exemption in relation to the capital gain made on the sale of the property? | A2: Yes.

Relevant facts and circumstances: The original property was purchased jointly by your relatives prior to 1985. After 1985, your relative died leaving your other relative owning 100% of the property. Your relative continued living in the house until they passed. The residence remained vacant during this period and was not lived in by you or rented to anyone. You were transferred the property, under the will, from the estate. The house still remained empty and you did not live in the house and it was not rented out. The house was demolished and construction started a few years later. A new house was built to replace the old house. You and your family moved into this house less than 4 years after you acquired it and immediately after the new construction was completed. You and your family lived in the house and treated it as your main residence for more than 3 months. The property was sold in the relevant financial year. You and your spouse did not have any other main residence during this period.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 subsection 118-110 | Income Tax Assessment Act 1997 subsection 118-150

Reasons for decision: Detailed Reasoning - Assets acquired by the deceased person before 20 September 1985: If the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died, unless they made major improvements to it after that date. | Detailed Reasoning - Assets acquired by the deceased person on or after 20 September 1985: If a deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died. In this case, you inherited the property from your relative. They held a 50% interest in the property that was acquired prior to 1985 and a 50% interest that was acquired after 1985. Your cost base for the 50% of the property acquired by your relative before 1985 will be the market value on the date of death of the deceased. However, your cost base for the 50% of the property acquired by your relative after 1985 will be the deceased's cost base. | Detailed Reasoning - Question 2: The main residence exemption is outlined in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997). Under section 118-110 of the ITAA 1997 you are eligible for a full main residence exemption if the dwelling has been the family home for you, your partner and other dependents for the whole period you have owned it (ownership period), has not been used to produce assessable income - that is, you have not run a business from it or rented it out, and is on land that is not more than 2 hectares in area. The purpose of section 118-150 is to extend the main residence exemption in Subdivision 118-B of the ITAA 1997 to land in which you have an ownership interest (other than a life interest) if you build, renovate or repair a dwelling on the land and that dwelling becomes your main residence. Taxation Determination TD 2000/16 states that: 2. If you build a dwelling on vacant land, you may choose under subsection 118-150(2) to apply the main residence exemption for the period from when you acquire your ownership interest in the land until the dwelling becomes your main residence. This period may not exceed four years before the dwelling becomes your main residence: subsection 118-150(4)). The dwelling must become your main residence as soon as practicable after work in building the dwelling is completed and must continue to be your main residence for at least 3 months: subsection 118-150(3). 3. If there is a dwelling or a partly completed dwelling on the land when you acquire your ownership interest in the land, but the dwelling is never occupied by you or someone else, the period for which you may choose to apply the main residence exemption for the dwelling is the same as in paragraph 2 of this Taxation Determination. Subsection 118-150(5) does not operate to alter the start of the period in paragraph 118-150(4)(b) for which you choose to apply the main residence exemption. You can make a choice under this section only if a dwelling on the land that you construct, repair or renovate becomes your main residence as soon as practicable after the work is finished and it continues to be your main residence for at least 3 months. | Detailed Reasoning - Application to your circumstances: In this case, you acquired an ownership interest in land with a dwelling from your relative's estate. You and your family have never occupied the dwelling and it has been vacant since you acquired it. The existing dwelling was demolished and a new dwelling was build. You and your family moved into the newly built dwelling within 4 years of acquiring the property and lived in it for more than 3 months. As discussed in TD 2000/16, you may choose (under subsection 118-150(2) of the ITAA 1997) to apply the main residence exemption for the period from when you acquired your ownership interest in the property until the dwelling becomes your main residence. Therefore, as the property was your main residence for the entire ownership period, you are entitled to a full main residence exemption.