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Edited version of private ruling
Authorisation Number: 1011793142616
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Ruling
Subject
CGT- main residence exemption
Question 1
Are you entitled to a full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of a duplex?
Answer
No.
Question 2
Is the cost base of the duplex calculated on the market value of the duplex when it is completed?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on:
Year ending 30 June 2011
Relevant facts and circumstances
You and your spouse purchased a property in 19xx. The property is on a block of land that is less than two hectares. This property is your main residence.
You will demolish the original house and rebuild a duplex within four years. After completion you and your spouse will move back into one of the units of accommodation in the duplex for at least x months. You intend to rent out the other unit of accommodation.
The duplex will be sold by 20xx.
Question 1
Detailed reasoning
You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event occurs to a CGT asset.
The subdivision of land and construction of a duplex is not a CGT event because ownership interest in the land does not change. Each unit of accommodation in the duplex is simply registered under a separate title and becomes two separate dwellings. A CGT event will occur when the duplex is sold.
Under the main residence exemption, a capital gain or capital loss made from a CGT event that happens to a dwelling is disregarded if the dwelling was your main residence throughout the period you owned it. The main residence exemption can apply to up to two hectares of land adjacent to a dwelling if the land was used primarily for private or domestic purposes in association with the dwelling.
In your case, your current dwelling will be demolished and you will build a duplex within four years. You intend to move back into one of the units of accommodation in the duplex after completion and stay for a minimum of x months. Therefore you are entitled to a CGT exemption on the dwelling that is your main residence for the period you lived in it, which includes the period the old dwelling was being demolished and rebuilt.
The other unit of accommodation you did not live in will be subject to any capital gain or loss when the duplex is sold because it is not your main residence.
Question 2
Detailed reasoning
The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.
The cost base of a CGT asset is made up of five elements:
1. Money or property given for the asset
2. Incidental costs of acquiring the CGT asset or that relate to that event
3. Costs of owning the asset
4. Capital costs to increase or preserve the value of your asset or to install or move it
5. Capital costs of preserving or defending your ownership of rights to your asset
You need to work out the amount for each element, and then add them together to work out the cost base of your asset for CGT purposes.
For example:
· Element 1 would include the amount that you paid for home originally.
· Element 2 would include borrowing costs such as loan application fees and mortgage discharge fees.
· Element 3 would include interest payments on borrowings to finance your purchase of the home, as long as they have not been previously claimed as a tax deduction.
· Element 4 would include costs associated with demolishing and rebuilding.
· Element 5 would include costs incurred when defending your ownership, such as a legal challenge.
Please note that if you make a loss your reduced cost base is calculated differently. Element 3 costs are not included in your calculations. Also, if your gain is small you can only deduct amounts up to the value of your gain. Deductions can not turn a gain into a loss.
When you dispose of the duplex you will need to calculate the capital gain or capital loss made on each unit of accommodation in the duplex and land separately.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20,
Income Tax Assessment Act 1997 Section 110-25,
Income Tax Assessment Act 1997 Section 112-30,
Income Tax Assessment Act 1997 Section 118-110,
Income Tax Assessment Act 1997 Subsection 118 -115(1),
Income Tax Assessment Act 1997 Section 118 -120 and
Income Tax Assessment Act 1997 Section 118 -150.
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