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Edited version of private ruling

Authorisation Number: 1011831589895

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Ruling

Subject: Capital gains tax - disposal of main residence

Question 1: Is the dwelling you resided in prior to its disposal considered to be your main residence for capital gains tax (CGT) purposes?

Answer: Yes.

Question 2: Is the capital gain or capital loss made on the disposal of your dwelling disregarded?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

In 19XX you acquired a property (the property) solely in your name.

Until late 200X the property had been used solely as an investment property.

You have never been involved in buying and selling of properties for a short term gain. You have been a long term investor looking to maximise capital growth.

The dwelling on the property was an older weatherboard home. Over the years the general condition of the property had degraded to the point where it fell below the current market expectations and it was not suitable to be rented out. It was not an attractive property for the real estate agents to have on their books.

You had been advised to undertake extensive and expensive renovations to the property to bring it up to the current market standard and expected level of safety.

You own a business. The business ceased trading some years ago but is still an active shelf company, available for you to use for future business purposes.

You have never resided at the property as your main residence as you were residing at your parent's home.

You commenced gathering information, quotes and valuations to determine the viability of subdividing the property to construct two new dwellings (dwelling A and dwelling B).

Dwelling A would be your primary residence and dwelling B would be rented out.

You obtained a written rental appraisal for dwelling B. The appraisal showed that it would achieve a significant weekly rental as you wished to continue being a rental investor.

The construction of the two dwellings was not conducted as a business entity but as a personal investment venture.

You have made the choice to treat the property as your main residence from the signing of the contract for the construction of the two dwellings.

You obtained an investment loan to undertake the construction of the two dwellings. The loan viability as assessed by the lender was based on your income plus the expected rental income.

Due to the degree of expenses of the construction and your limited finances it was necessary to separate the construction of the dwellings. Dwelling A was completed first then dwelling B was completed.

When the construction of dwelling A was completed you moved in and established it as your main residence.

Your initial loan was raised by a financial institution. The institution was going through financial stress, which resulted in their collapse.

Receivers and manager were appointed to manage the financial institution.

Part of your finance package had been that you had invested a considerable amount of your own funds with the financial institution. You drew down some of these funds during the construction of the dwellings the remaining funds were needed to service your loan.

Your invested funds were frozen when the financial institution collapsed.

You were not able to complete dwelling B.

You were forced to refinance and you were disadvantaged in your position to obtain a competitive interest on your new loan which further added to your costs.

Due to your difficult financial position you could no longer afford to live in dwelling A, continue to finance dwelling B and maintain the higher debt with only the budgeted future rental income.

You needed to dispose of one of the dwellings to reduce the debt burden to remain solvent.

The only dwelling that was fully completed and was in marketable position was your dwelling A.

You disposed of dwelling A.

You have now moved into dwelling B and established it as your main residence.

You have provided copies of documentation to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 108-55

Reasons for decision

Separate assets pre CGT land and post CGT dwelling

For CGT purposes there are exceptions to the common law principle that what is attached to the land is part of the land and rules about when a capital improvement to a CGT asset is treated as a separate CGT asset.

A building or structure that is constructed on land that you acquired before 20 September 1985, is taken to be a separate CGT asset from the land if:

In your case, you acquired the property prior to 20 September 1985 (pre CGT) and the contract for the construction of the two dwellings was entered into after 200X (post CGT), for the purposes of CGT. The dwellings are considered to be a separate CGT asset from the land.

Main residence exemption

Where the asset is a dwelling that was your main residence for your entire ownership period any capital gain or capital loss made on the disposal is disregarded.

Generally, if you build a dwelling on land you already own, the land does not start to qualify for the main residence exemption until the dwelling actually becomes your main residence. However, where you construct a dwelling on vacant land that you own, you can choose to treat the land as your main residence for up to four years before the dwelling becomes your main residence.

You can only make this choice if the dwelling becomes your main residence as soon as practicable after its construction is finished and it continues to be your main residence for a minimum of three months.

Once you have made this choice, no other dwelling can be treated as your main residence during this time.

In your circumstances, the dwelling was constructed within four years of it becoming your main residence, you moved into dwelling A as soon as practicable after its construction and it has been your main residence for over three months.

You chose dwelling A as your main residence at the signing of the contract for the construction of the two dwellings.

Therefore, you are entitled to a full main residence exemption and any capital gain or capital loss that you make on the disposal of dwelling A is disregarded.

Note: You will be entitled to a partial main residence upon disposal of dwelling B.

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