Private ruling: Capital gains tax
Published: June 2013
Ruling period: Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2007

Ruling: Question and answer | Are you entitled to a full main residence exemption upon the sale of the property? | Yes.

Relevant facts and circumstances: You purchased the property several years ago. The dwelling on the property was unsuitable to inhabit and was demolished and building of the new dwelling began. The dwelling was ready for occupancy in the financial year ending 30 June 2011. You did not move into the dwelling immediately as your children were enrolled in school in another location a significant distance away from the dwelling. In the financial year ending 30 June 2011, after the school term ended, you moved into the dwelling. You are registered for the electoral roll at the property's address. Your mail relating to the property is directed to the property's address. You have no personal belongings at the property. All utilities and connections are in your name. Your intention was to live in the dwelling there indefinitely. After a period of time occupying the dwelling you vacated the dwelling. The property was subsequently rented out. You intend to sell the property in the year ending 30 June 2014.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110. | Income Tax Assessment Act 1997 Subsection 118-145(2). | Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT): You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 100-20 Income Tax Assessment Act 1997 (ITAA 1997)). Land and buildings are specifically listed as CGT assets (section 100-25 of the ITAA 1997). The disposal of a CGT asset causes a CGT event A1 to happen. You dispose of an asset when a change of ownership interest occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs (section 104-10 of the ITAA 1997). You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (section 100-35 of the ITAA 1997). In your case, a CGT event will occur when you dispose of the property. | Detailed Reasoning - Main residence exemption: The main residence exemption provides that the capital gain or capital loss that is made from the disposal of a dwelling or the ownership interest in it will be disregarded if the person is an individual, and the dwelling was the main residence throughout the ownership period (section 118-110 of the ITAA 1997). Section 118-110 of the ITAA 1997 provides an exemption from capital gains tax if the property was the taxpayer's main residence. This section states that: A capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. The Guide to capital gains tax sets out the following factors that may be relevant in working out whether a dwelling is a taxpayer's main residence: · the length of time you live there - there is no minimum time a person has to live in a home before it is considered to be their main residence · whether your family lives there · whether you have moved your personal belongings into the home · the address to which your mail is delivered · your address on the electoral roll · the connection of services (for example, phone, gas or electricity) · your intention in occupying the dwelling. A mere intention to construct or occupy a dwelling as your main residence - without actually doing so - is not sufficient to obtain the exemption. In your case, the property is the only residential dwelling that you own; the property's address is where you are registered on the electoral roll. Mail relating to the house is directed to the property. Your family moved in to the property. All utilities and connections are in your name. You intention was to live there indefinitely. Therefore, you are entitled to the main residence exemption under section 118-110 of the ITAA 1997 for the period when you physically lived in the house. | Detailed Reasoning - Absence rule: Where a dwelling is used to produce income, you can choose to treat the dwelling as your main residence for up to six years after you cease living in it. If you move back to the dwelling and treat it as you main residence, the six year rule will begin again once you move out, as per section 118-145 of the ITAA 1997. In your case, you have elected to treat the dwelling as your main residence after you ceased living in it in the financial year ending 30 June 2012 until the date you sell it, which will be in the 2014 income year. The dwelling has been used to produce income during your absence; however, as the total absence period is less than six years, you are able to rely on section 118-145 of the ITAA 1997 for this whole period. Therefore, you are entitled to the main residence exemption for the period beginning when you moved out of the dwelling, in the financial year ending 30 June 2012, until the date the property is sold in the 2014 income year. | Detailed Reasoning - Building, renovation or repairing a dwelling: Section 118-150 of the ITAA 1997 extends the main residence exemption by allowing a taxpayer to choose for the main residence exemption to apply to land for a maximum period of up to four years before the dwelling actually becomes their main residence. In order for section 118-150 of the ITAA 1997 to apply, all conditions of that section must be met. Subsection 118-150(1) of the ITAA 1997 states that you must have an ownership interest in the land if you build a dwelling on the land, or repair, renovate or finish building a dwelling on the land. In your case, you owned the land prior to the demolishment and rebuild, therefore this condition is met. Subsection 118-150(2) of the ITAA 1997 states that the dwelling you are building, repairing or renovating on the land was your main residence from the time you acquired the ownership interest. In your case, you nominated the dwelling you are building on the land were as your main residence from the time you acquired the ownership interest in the land. This condition has been met. Subsection 118-150(3) of the ITAA 1997 states that the dwelling must become the main residence of a taxpayer as soon as practicable after the construction of the dwelling is finished. Whether the dwelling becomes the taxpayer's main residence as soon as practicable after the construction of the dwelling is finished, depends on the facts of each case. The personal circumstances of the taxpayer may be relevant in limited cases only. In your case, you moved into the dwelling as soon as your children's school term ended, which was as soon as practicable given that you were living in another location at the time the dwelling became available to live in. A further condition of the main residence exemption is subsection 118-150(3)(c) of the ITAA 1997 which states that you must continue to use the dwelling as your main residence for at least three months. In your case, you physically lived in the dwelling for a short period. However, this period was immediately succeeded by a period in which you treated the dwelling as your main residence under section 118-145 of the ITAA 1997. Therefore, for the purposes of paragraph 118-150(3)(b) of the ITAA 1997, the dwelling continued to be your main residence to the requisite period of at least 3 months. Therefore, in your case, you have met all the conditions set out in section 118-150 of the ITAA 1997, and are entitled to the main residence exemption for the period beginning when you purchased the property in 2007 until you physically moved into it in June 2011. | Detailed Reasoning - Conclusion: You are entitled to the main residence exemption under section 118-110 of the ITAA 1997 for the period you actually lived in the house. You are entitled to the main residence exemption under section 118-145 of the ITAA 1997 for the period prior to living in the house. You are entitled to the main residence exemption under section 118-150 of the ITAA 1997 for the period you moved out of the house, until when it is sold in the 2014 income year. Therefore, as these exemptions cover your entire ownership period, you are entitled to a full main residence exemption when you sell the property.