Private ruling: Capital gains tax and main residence exemption
Published: December 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | 1. Are you entitled to a full exemption from capital gains tax on the sale of your property B? | No. | 2. Are you entitled to a partial exemption from capital gains tax on the sale of your property B? | No. | 3. Are you entitled to the 50% general exemption discount on the property? | Yes

Relevant facts and circumstances: You and your family resided in your home A. You purchased land and commenced building a house. The contract to purchase the land was exchanged in 2011 with settlement in 2012. Construction commenced in 2012 with the Certificate of Occupancy issued in 2013. Property A was sold one month before you moved into property B. A member of your family fell ill and it was determined to send the family overseas. The property was put on the market and sold within three months of the original property being sold. You chose property A to be your principle residence for the period that you owned it.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5. | Income Tax Assessment Act 1997 Subsection 6-10. | Income Tax Assessment Act 1997 Subsection 118-150. | Income Tax Assessment Act 1997 Subsection 115-25(1). | Income Tax Assessment Act 1997 Section 115-40

Reasons for decision: Summary: Section 118-150 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to choose to apply the main residence exemption to vacant land under certain circumstances. Specifically, subsection 118-150(3) of the ITAA 1997 provides that you can make the choice only if the dwelling that you construct on the land becomes your main residence and the dwelling continues to be your main residence for at least three months. Subsection 118-150(4) of the ITAA 1997 states that there is a time limit that applies in being able to apply the exemption. The time limit is the shorter of: • four years before the dwelling becomes your main residence; or • the period starting when you acquired the land and ending when the dwelling becomes your main residence. Subsection 118-150(6) of the ITAA 1997 provides that once you make the choice to apply the main residence exemption to the land, no other dwelling can be treated as your main residence. However, section 118-140 of the ITAA 1997 allows a maximum of six months in which you may apply the main residence exemption to two dwellings when you are changing main residences. You claimed the main residence on their property A until it was sold. You then moved into your property B which you sold within three months of selling property A. As you did not use the dwelling as your main residence for at least three months you do not meet the requirements of paragraph 118-150(3)(c) of the ITAA1997 and consequently will not be able to disregard the capital gain or loss on disposal of the selling property B. | Detailed Reasoning - Discount: Division 115 of the ITAA 1997 provides a discount method in relation to the calculation of a capital gain. Under this Division, a discount capital gain remaining after the application of any capital losses and net capital losses from previous income years is reduced by the discount percentage when working out your net capital gain. You can use the discount method in Division 115 of the ITAA 1997 to calculate your capital gain if: • you are an individual, a trust or a complying superannuation entity • a capital gains tax (CGT) event happens in relation to an asset you own • the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 • you acquired the asset at least 12 months before the CGT event, and • you did not choose to use the indexation method. Under subsection 115-25(1) and section 115-40 of the ITAA 1997, a capital gain will be a discount capital gain, and therefore able to be reduced by the discount percentage, if it results from a CGT event happening to a CGT asset that was acquired at least 12 months before the CGT event. As you held the property for more than 12 months you are entitled to the 50% discount.