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Ruling

Subject: CGT

Question:

Are you entitled to a partial main residence exemption for any capital gain or loss on the sale of your second residence?

Answer: Yes.

This ruling applies for the following period: 1 July 2011 to 30 June 2014.

Year ended 30 June 2012.

Year ended 30 June 2013.

Year ended 30 June 2014.

The scheme commenced on:

1 July 2011.

Relevant facts:

You purchased a property, which is situated on less than 2 hectares of land.

You intend to subdivide the property which your main residence currently sits on into 2 equal sized blocks in the next X months.

You intend to develop a new house on the block 2.

You intend to live in block 1, your main residence until block 2 is finished.

You intend to move into the new house on block 2 on completion and make this your principle place of residence.

You intend for construction to take X months to complete and be ready for habitation.

You intend to rent the residence on block 1.

You intend to sell the new house on block 2 in X years time.

You do not own any other property.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102 - 20.

Income Tax Assessment Act 1997 Section 118 -110.

Income Tax Assessment Act 1997 Section 118 -150.

Income Tax Assessment Act 1997 Section 118 -140.

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain capital gains you make and section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) indicates that you may make a capital gain or capital loss as a result of a 'CGT event'.

The most common CGT event is CGT event A1 and this occurs when an entity disposes of the ownership interest in an asset. The sale of a dwelling and land would be considered to be a CGT event A1.

Capital gains tax and main residence provisions

For main residence exemptions to apply to the disposal of land the land must have a dwelling on it and they must be disposed of simultaneously.

Section 118-110 of the ITAA 1997 directs that you can disregard a capital gain or capital loss made on the sale of a dwelling and land that is your main residence (your home) if:

· the dwelling was your home for the whole period you owned it,

· the dwelling was not used to produce assessable income, and

· any land on which the dwelling is situated is not more than two hectares.

In general, you can only have one main residence at any given time.  One exception to this is when you are changing main residences, i.e. moving homes.

Additionally, section 118 -150 of the ITAA 1997 indicates that if you build a dwelling on land you already own, the land does not qualify for 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.

All references to "residence 1" refers to your current and original property and dwelling, which has been your main residence since you purchased it.

The subdivided block and additional dwelling that will result from the subdivision and build scheduled in the next X months for completion will be referred to as "residence 2".

You are currently living in residence 1. You intend to live in your current home and main residence, residence 1, until after the subdivision and additional house is built i.e. residence 2 is complete and habitable.

You intend to complete residence 2 within X months.

You have been living in residence 1 since 2002. You do not own any other property nor have you had any other main residences for the period of ownership. Therefore residence 1 will be your main residence from the time you acquired your ownership interest. You have said you will elect for residence 2 to be your main residence as soon as it is completed and you move in.

Moving to the second house

Section 118 -140 of the ITAA 1997 indicates that if you acquire a new home before you dispose of your old one, both dwellings are treated as your main residence for up to six months if:

· the old dwelling was your main residence for a continuous period of at least three months in the 12 months before you disposed of it,

· you did not use it to produce assessable income in any part of the 12 months when it was not your main residence, and

· the new dwelling becomes your main residence.

If you dispose of the original dwelling within six months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one.

Taxation Determination TD 1999/43 explains that the provisions of section 118-140 of the ITAA 1997 also applies where a new home is built and considered a main residence under the provisions of section 118-150 of the ITAA 1997.

In your case you will have:

· lived in the first house for a period of at least 3 continuous months,

· you will choose the first house to be your main residence up until the completion of the residence 2,

· you intend for residence 2 to be constructed and habitable in X months from commencement,

· residence 1 will be used to produce assessable income once you vacate it,

· you have indicated that you intend to rent residence 1 after you move into residence 2,

· you will choose residence 2 to be your main residence, and

· CGT event A1 will occur when you will sell residence 2 in X years time.

As you intend to use residence 1 to produce assessable income you cannot make use of section 118-140 and have two main residences for 6 months.

Therefore the main residence exemption for residence 1 will not be available after you occupy residence 2.

In addition, from the date the construction commences, until residence 2 is habitable, the land on which residence 2 is being constructed, and any land used in the construction process is not being used in connection with your main residence.

Therefore only a partial main residence exemption will apply from the date residence 2 becomes habitable and your main residence.

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