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Edited version of your written advice
Authorisation Number: 1013031637954
Date of advice: 9 June 2016
Ruling
Subject: Income tax - Capital gains tax - CGT - main residence
Question 1
Will House B be entitled to a full main residence exemption?
Answer
No.
Question 2
Will House B be entitled to a partial main residence exemption?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 2017
The scheme commences on
1 July 2016
Relevant facts and circumstances
You purchased a property with a dwelling on the land (House A) in 19XX. You moved in as soon as practicable, and treated the dwelling as your main residence.
In 20XX, you built a new dwelling (House B) next to House A on the same land and moved into House B as soon as practicable.
Four months later you demolished House A.
You intend to subdivide the land and build another dwelling where House A was located
(House C).
You intend to move into House C as soon as practicable and sell House B.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-115
Income Tax Assessment Act 1997 Section 118-120
Income Tax Assessment Act 1997 Section 118-145
Income Tax Assessment Act 1997 Section 118-150
Income Tax Assessment Act 1997 Section 118-185
Reasons for decision
Main Residence Exemption
A capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if:
• you are an individual
• the dwelling was your main residence, and throughout your ownership period the property was not used to produce assessable income, and
• any land on which the dwelling is situated is not more than two hectares.
For the purposes of working this out:
• the term dwelling includes the land under the unit of accommodation as well as the physical building; and
• the reference to ownership period includes ownership of land on which the dwelling is later built.
If you own more than one dwelling during a particular period, only one dwelling can be your main residence at any one time.
Constructing a dwelling on land you already own
If you build a dwelling on land you already own, the land usually does not start to qualify for the main residence exemption until the dwelling becomes your main residence.
However, if you are building, repairing or renovating a dwelling on land in which you have an ownership interest you may choose to extend the main residence exemption for the dwelling to include the shorter period of:
• four years before the dwelling becomes your main residence, or
• the period starting from when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.
However, you can make this choice only if the dwelling:
• becomes your residence as soon as practicable after the dwelling is built, repaired or renovated; and
• continues to be your residence for at least three months.
Land adjacent to the dwelling
The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed 2 hectares. If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the main residence exemption extends to the adjacent land. However, if you dispose of adjacent land at a different time than when you dispose of your main residence, the exemption does not apply to the adjacent land.
Subdivision of land
When you subdivide a block of land, each smaller block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing the land does not in itself change the ownership of the subdivided blocks. Therefore, you do not make a capital gain or loss at the time of subdivision.
You are taken to have acquired the subdivided blocks when you acquired the original land and house.
Partial main residence exemption
If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption.
You calculate your capital gain using the following formula:
Capital gain x Non-main residence days
Total number of days in your ownership period
Your non-main residence days are the number of days in your ownership period when the dwelling was not your main residence. The ownership period commences from the date that you had an ownership interest in the house or the land on which the house was built. That is from the time that you had a right to occupy the land until settlement upon disposal of the land.
Application to your situation
In your case, you purchased House A in 19XX. You lived in this dwelling as your main residence from settlement until such time as House B was habitable.
You used the land adjacent to House A (where House B was constructed) in conjunction with House A until such time as House B was constructed.
This means that House B could be your main residence for capital gain purposes 4 years prior to moving in, making House A your main residence for about fourteen years. You would also need to consider that House A would only be entitled to a partial exemption.
You have the choice on which House may be your main residence, but, in the case of House B, choice only applies to the four year period prior to constructing a residence.
You should also keep in mind that the partial main residence exemption is calculated by non-main residence days, divided by total ownership days. Ownership days for House A and House B both start in 19XX. Non-main residence days for House B also start in 19XX.
Further information for you to consider
You will need to work out which dwelling will be more advantageous as your main residence.
Scenario one:
If you were to make an Absence choice on House A, it would retain its main residence exemption until such time as it is demolished.
You would then be able to claim an exemption on the vacant land for up to four years, provided House C is constructed and established as a main residence within those four years.
This is because House C would be seen as a replacement asset of House A and would retain a full main residence exemption for the whole period of ownership.
However, in this scenario House B will be liable for CGT for the entire ownership period as there will be no main residence exemption should you choose this option.
Scenario two:
If you choose House B as your main residence, then this will leave House A, liable for CGT for the period of time it was not the main residence.
This means both House A and House B will be eligible for a partial main residence exemption.
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