Private ruling: Capital gains tax
Date of advice: 21 September 2022
Published: December 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you required to pay Capital gains tax on the sub-divided land and newly constructed house when it is sold? | A1: Yes. | Q2: Are you entitled to a partial main residence exemption on the sub-divided land and newly constructed house? | A2: Yes.

Relevant facts and circumstances: You purchased a property over two decades ago and treated this property as your main residence. You decided to sub-divide your property in a few years ago and turn the back yard into a separate lot. The sub-division commenced in the same year. A real estate agent has allocated a portion of the original purchase price to the house and land that you treated as their main residence and the remainder to the sub-divided block of land' The sub-division was completed on approximately two years later and the titles were registered. In the following month you sold the original house. Your original property settled a few weeks later. You lived in a rental property until the new house was completed on the sub-divided block. You had a house built on the sub-divided land and moved into this property and treated it as your main residence. The new house commenced being built earlier in the same year. You moved into the house at the end of the year. You now plan to sell this property in a future income year and will make a capital gain from the sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 104-10

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 when the change of ownership occurs. CGT event A1 will occur upon the disposal of block one and block two. | 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. | 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. | Detailed Reasoning - Construction of dwelling: 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 the circumstances set out in your ruling application. | Detailed Reasoning - Taxation Determination TD 2000/13: This determination applies where you do not elect to treat the house on the sub-divided block as your main residence before you move into it. By making this election this entitles you to the full main residence exemption on the disposal of original house for your entire ownership period. However, you will only be entitled to a partial main residence exemption on the disposal of the sub-divided house and land. Paragraph 9 of TD 2000/13 states: 9. The land adjacent to dwelling B is only used for part of your period of ownership of dwelling B primarily for private or domestic purposes in association with dwelling B. Before constructing dwelling B and it becoming your main residence, that land is used in association with dwelling A. Only a portion of the capital gain or capital loss you make on the adjacent land associated with dwelling B may be disregarded under subsection 118-120(1). You will be required to pay CGT on the period of time that the sub-divided property was not your main residence. | Detailed Reasoning - Partial exemption: Where a full exemption is not available, you may be entitled to a partial exemption under section 118-200 of the ITAA 1997. You calculate your capital gain or capital loss as follows: Capital gain or capital loss amount x Non-main residence days Total days