Edited version of your written advice

Authorisation Number: 1013118446344

Date of advice: 7 November 2016

Ruling

Subject: Capital gains tax- main residence exemption

Question 1

Are you entitled to a full capital gains tax (CGT) main residence exemption when you dispose of dwelling B?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You acquired a property after 20 September 1985 (the property).

The property comprised of an area of land which was less than 2 hectares.

At the time of acquisition, there was one dwelling situated on the property (dwelling A).

You moved in to dwelling A and it was your main residence for your full period of ownership.

A planning permit for the subdivision of the property was approved in 20XX.

The two properties were then recorded on separate titles.

You were granted permission by the council to sell dwelling A before construction of a new dwelling on the subdivided block (dwelling B).

The sale of dwelling A was settled in 20XX.

After the sale of dwelling A you stayed with friends while dwelling B was built.

You moved in to dwelling B immediately after receiving the certificate of occupancy in late 20XX and you continue to live in it.

Dwelling B will be sold in the income year ending 30 June 20ZZ.

You will treat dwelling B as your main residence up until the date of settlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-140

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Subdivision of land

Subdivision of land is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title.

The acquisition date of the subdivided block will be your original purchase date.

However, the cost base of the original land needs to be apportioned between the subdivided blocks on a reasonable basis.

Taxation determination TD 1997/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis.

Main residence exemption

You disregard a capital gain or loss which you make in relation to a CGT asset where you are an individual, the dwelling was your main residence for the full period of ownership and you did not acquire your interest in it as either the trustee or beneficiary of a deceased estate.

You can only have one main residence at any time, except in limited circumstances when you are changing main residences.

Changing main residences

If you acquire an ownership interest in a dwelling which is to become your main residence 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 and you did not use it to produce assessable income in any part of that 12 months when it was not your main residence.

Treating land as your main residence

If you build a dwelling on land you already own, the land generally does not qualify for the main residence exemption until the dwelling actually becomes your main residence.

However, you can choose to treat the land as your main residence for up to 4 years before the dwelling becomes your main residence in certain circumstances.

The requirements for this exemption are that you must build a dwelling on the land and move into it as soon as practicable after it is finished. You must continue to use the dwelling as your main residence for at least 3 months after it becomes your main residence.

If these conditions are met, then you can claim the main residence exemption for the shorter of the following periods:

● the four year period immediately before the date the dwelling becomes your main residence, or

● the period between the date you acquired the land and the date the dwelling becomes your main residence.

Changing main residences and treating land as your main residence at the same time

Draft Taxation Determination TD 1999/43 states that you are allowed to apply section 118-140 of the Income Tax Assessment Act 1997 (ITAA1997) and section 118-150 ITAA 1997 (if you build, renovate or repair a dwelling) at the same time.

Application to your circumstances

In your case, you moved in to dwelling A after you purchased the property and it was your main residence until you disposed of your interest in it.

You acquired your ownership interest in the subdivided block (dwelling B) at the same time you acquired your interest in dwelling A.

You built dwelling B on the subdivided block and established it as your main residence as soon as practicable after the build was completed. You have used dwelling B as your main residence for more than 3 months after you moved in.

You are therefore entitled to treat Dwelling B as your main residence from when you sold dwelling A until dwelling B ceases to be your main residence under the rules relating to treating land as your main residence.

You held an ownership interest in dwelling A and dwelling B at the same time. You lived in dwelling A for a continuous period of at least three months in the twelve month period before dwelling B became your main residence, and did not use dwelling A to produce income. You are therefore entitled to treat both dwelling A and dwelling B as your main residence for a period of six months prior to your sale of dwelling A.

In summary, you are entitled to a partial main residence exemption for dwelling B from six months before you sold dwelling A, until you sell dwelling B, unless the dwelling ceases to be your main residence or is used to produce income before you dispose of it.

You are not entitled to the main residence exemption for dwelling B for the period between when you originally purchased the property and six months before you disposed of dwelling A, as dwelling A was your main residence for this period.

Calculating the 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.

In your circumstances the property was not your main residence for your entire period of ownership. Therefore you would need to calculate the capital gain based on the above formula.

Further issues to consider

50% discount

You are entitled to apply the 50% discount to any amount of capital gain on which you must pay tax where you are an individual and you have owned the CGT asset for at least 12 months.

ATO view documents

Taxation Determination TD 2000/13

Taxation Determination TD 2000/14

Draft Taxation Determination TD 1999/43

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