Private ruling: Capital gains tax - main residence - subdivision - new dwelling
Date of advice: 11 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will dwelling A, be entitled to a full main residence exemption? | A1: Yes | Q2: Will dwelling B, be entitled to a full main residence exemption? | A2: No. | Q3: Will dwelling B, be entitled to a partial main residence exemption? | A3: Yes

Relevant facts and circumstances: You acquired an interest in a dwelling after 20 September 1985. (The dwelling) The dwelling is your main residence and it has not been used to produce assessable income. The size of the land is 'X' sqm. You will subdivide the land and create 2 titles. You will partially demolish your existing main residence as part of the new subdivision. Lot 1 will contain your existing main residence. (Dwelling A) Lot 2 will contain a newly constructed dwelling. (Dwelling B). You will move into dwelling B as soon as practicable after construction is completed. You will choose to continue to treat dwelling A as your main residence. You will dispose of dwelling A in early 20XX. You will occupy dwelling B for the whole period after you moved in, until you dispose of it during the 20YY income year.

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: The most common capital gains tax (CGT) event (CGT event A1) 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, in this case when the change of ownership occurs. CGT event A1 will occur upon the disposal of dwelling A and dwelling B. | 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 dwelling A. Therefore, they do not form part of the cost base of the vacant block of land which will contain dwelling B. | 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 the main residence purposes, the ownership period of a residential property 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 - 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. Taxation Determination TD 2000/13 discusses the application of the CGT provisions to arrangements similar to those which you are planning to undertake. | Detailed Reasoning - Application to your circumstances: You did not elect to treat block B as your main residence before you moved into it. Making this election this entitles you to the full main residence exemption on the disposal of block A for your entire ownership period. However, you will only be entitled to a partial main residence exemption on the disposal of block B, even taking into consideration the six months when you changed main residences. You will not qualify for the main residence exemption for the period starting from when you acquired the land to the time you moved into the dwelling on block B. | 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 In this case, your non-main residence days are the number of days in your ownership period when dwelling B 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 until settlement upon disposal of the land.