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Authorisation Number: 1011598772132

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Ruling

Subject: CGT-Main Residence Exemption

Question

Is the main residence exemption in Subdivision 118-B Income Tax Assessment Act 1997 (ITAA 1997) available to exempt a capital gain made on disposal of a dwelling that was intended to be used as the Taxpayer and their ex spouse's main residence but was not used in that way?

Answer: Main residence exemption is available only on 50% of the capital gain.

This ruling applies for the following period

01.07.2009 to 30.06.2010

Relevant facts and circumstances

Taxpayer (TP) sold the block of land and the partially built property. TP had to sell the property before the building works were completed and without having resided in it.

TP has no other property.

The block of land was bought jointly with TP's late/ex spouse with the intention of building a house on it using it as their principal home.

TP and their family have been living in rented accommodation and are still currently living in their rented home.

The building works to construct dwelling commenced and was continuing until the date the property was sold.

TP separated from their spouse (part owner of this land) while the property was still being built.

10 months after their separation, their ex spouse was involved in an accident and suffered brain injury.

One year later TP's ex spouse died.

TP couldn't afford to continue building this property as they have two schoolchildren who need looking after and TP had to sell the block of land with the building of the dwelling still unfinished.

TP always planned to live in the property as their principle home, however due to the above events; they could no longer afford to continue with the building of the dwelling work and had to dispose of it.

Relevant legislative provisions

Division 115 Income Tax Assessment Act 1997

Subdivision 118-B-Income Tax Assessment Act 1997

Section 118-110-Income Tax Assessment Act 1997

Section 118-150-Income Tax Assessment Act 1997

Section 118-155-Income Tax Assessment Act 1997

Section 118-195-Income Tax Assessment Act 1997

Reasons for decision

Subdivision 118-B ITAA 1997 contains the CGT main residence exemption. The basic case is contained in section 118-110 ITAA 1997 and generally provides that an individual can disregard a capital gain that arises from disposing of his or her main residence.

Sections 118-150, 118-155 and 118-195 ITAA 1997 extend the main residence exemption to cover specific circumstances.

Section 118-150 ITAA 1997-Choosing to treat land as your main residence while you build:

Generally, if you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling becomes your main residence for capital gains tax (CGT) purposes.

However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence in certain circumstances. You can choose to have this exemption apply if you acquire an ownership interest (other than a life interest) in land and you:

· build a dwelling on the land

· repair or renovate an existing dwelling on the land, or

· finish a partly constructed dwelling on the land.

There are a number of conditions that you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then:

· move into the dwelling as soon as practicable after it is finished, and

· continue to use the dwelling as your main residence for at least three months after it becomes your main residence.

Period for which the land is exempt

The land, including the dwelling that is being built, renovated, repaired or finished on it, is exempt 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.

The intention of the TP and their late ex spouse to occupy a property as their principal residence is insufficient to give rise to the exemption in section 118-110 ITAA 1997. That section contemplated that a dwelling is actually occupied as a main residence throughout the ownership period, subject to the provisions in s 118-150 ITAA 1997 and 118-155 ITAA 1997.

The TP sold the property before the building was finished and without having resided in it at any stage. As building the dwelling had not finished and the TP did not reside in the property at any stage during the ownership period, the main residence exemption is not available on 50% of the capital gain in relation to the 50% share of the property that they owned before the death of their late divorced spouse.

Main residence exemption is not available on 50% of the capital gain in relation to the 50% share of the property that the TP held before their late ex spouse's share was transferred to them on their ex spouse's death.

The taxable capital gain made by TP on their original half share of the property is eligible for the 50% CGT discount under Division 115 ITAA 1997. That is only 50% of the capital gain made by TP on their original share of the property is taxable.

With respect to the half share of the property acquired by the TP as joint tenant as a result of the death of their ex spouse section 118-155 of the ITAA 1997 allows them to choose to treat the land and dwelling under construction as their ex spouse's main residence because the ex spouse died during construction.

However, this section limits the main residence exemption to the 4 years prior to their death.

Upon sale of the dwelling section 118-195 ITAA 1997 may give a full exemption to the TP on the half share acquired from their ex spouse. A full main residence exemption on this half share will be granted by this section if:

1. if the land was acquired on or after 20 September 1985

2. it was the deceased's main residence immediately before they died

3. it was sold by TP within 2 years of the ex spouse's death

As all three conditions are satisfied with condition two being satisfied as a result of section 118-155 ITAA 1997, TP receives a full main residence exemption on the half share of the property acquired from their ex spouse.

Accordingly, on disposal of the property Section 118-195 ITAA 1997 applies to exempt 50% of the capital gain. That is the capital gain in relation to the 50% share of the property that was held by the TP's spouse before their spouse's death and which passed to TP as a beneficiary.

Conclusion

50% of the capital gain derived on the disposal of the property will be exempt and 50% subject to capital gains tax. The 50% subject to capital gains tax will be reduced by the 50% CGT discount.