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Subject: Capital gains tax - Main residence - disposal

Question:

Can you disregard any capital gain or loss made on the disposal of a property you intended to be your main residence?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2011.

The scheme commenced on:

1 July 2003.

Relevant facts and circumstances

You purchased a block of land after 20 September 1985

You entered into a contract with a construction company to build a dwelling.

You rented a property during the construction period and did not treat any other dwelling as your main residence.

Construction commenced on the dwelling but was never satisfactorily completed.

You commenced proceedings against the construction company.

Your intention was to move into the dwelling as soon as construction was completed; however you did not ever reside in the dwelling as the dwelling was uninhabitable.

You sold the land and dwelling for an amount and you made a capital gain

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 118-35.

Income Tax Assessment Act 1997 section 118-150.

Income Tax Assessment Act 1997 subsection 118-150(3).

Reasons for decision

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

A taxpayer makes a capital gain if a their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.

A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.

Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate.

CGT - main residence

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

Generally, if you build a dwelling on land you already own, the land does not start to qualify for exemption under the main residence exemption provisions until the dwelling actually becomes your main residence.

However, section 118-150 of the ITAA 1997 allows you to choose for the main residence exemption to apply to land 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 the building work is finished and it continues to be your main residence for a minimum of three months (subsection 118-150(3) of the ITAA 1997).

Whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to:

· the length of time the taxpayer has lived in the dwelling

· the place of residence of the taxpayers family

· whether the taxpayer has moved his or her personal belongings into the dwelling

· the address to which the taxpayer has his or her mail delivered

· the taxpayers address on the Electoral Roll

· the connection of services such as telephone, gas and electricity

· the taxpayers intention in occupying the dwelling

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

Moving into the dwelling

To establish a dwelling as a main residence you must move in as soon as practicable. The term as soon as practicable is used in section 118-135 of the ITAA 1997 to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the property became your main residence on the date you acquired it (that is, you would have to physically move in on that day).

You did not move into the property due to the dwelling not being satisfactorily completed and you sold the dwelling without it ever being your main residence and accordingly you are unable to disregard any capital gain.

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