Edited version of private ruling

Authorisation Number: 1011863663153

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Ruling

Subject: Capital gains tax - Pre CGT land - Sub-division - Post CGT dwelling - Main residence

Question:

Is any capital gain or capital loss made on the disposal of block B disregarded?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012.

Year ended 30 June 2013.

Year ended 30 June 2014.

Year ended 30 June 2015.

Year ended 30 June 2016.

Year ended 30 June 2017.

The scheme commences on:

Before 20 September 1985.

Relevant facts

You bought a property before 20 September 1985. This property had an existing dwelling on it.

After 20 September 1985 you sub-divided the land.

In the same year as the sub-division you built a new dwelling on the sub-divided block, known as block B. (The original block and house is known as block A).

The dwelling on block B has been your main residence since it was built.

The dwelling on block A has been vacant since you moved into the dwelling on block B. In other words the dwelling on block A has not been rented out.

You plan to demolish the dwelling on block A and build a new dwelling, which you will then live in.

You will choose to continue to treat the dwelling on block B as your continuing main residence (absence choice) after you commence living in the newly constructed dwelling on block A.

For the purposes of this private binding ruling you will rent the dwelling out on block B from the time that you move into the newly constructed dwelling on block A until settlement of the sale of block B.

The settlement for the sale of block B will occur within six years of the date that the dwelling on block B was first rented out.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-23,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 108-5,

Income Tax Assessment Act 1997 Sub-section 108-55(2),

Income Tax Assessment Act 1997 Section 116-40,

Income Tax Assessment Act 1997 Section 118-25,

Income Tax Assessment Act 1997 Section 118-110,

Income Tax Assessment Act 1997 Section 118-120 and

Income Tax Assessment Act 1997 Section 118-145.

Reasons for decision

Summary

You can disregard any capital gain or capital loss made on the disposal of block B.

Detailed reasoning

Constructing a dwelling on pre CGT land

You have constructed a dwelling after 20 September 1985 (a post CGT asset), on land purchased before 20 September 1985 (a pre CGT asset).

Subsection 108-55(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where a building is erected on or after 20 September 1985 on land that was acquired before that date the building will be deemed to be an asset separate from the land.

Therefore, in relation to block B, you have two separate assets, the land that retains its pre-CGT status (because it was acquired before 20 September 1985) and the dwelling which is a post-CGT asset because it was built after 20 September 1985.

Pre CGT asset - land

A capital gain or capital loss made in relation to an asset acquired before 20 September 1985, is specifically disregarded by subsection 104-10(5) of the ITAA 1997.

Consequently, the land is not subject to capital gains tax, it is commonly referred to, or known as a pre-CGT asset.

Post CGT asset - dwelling

The dwelling was constructed by you after 20 September 1985 and is a post CGT asset, it is subject to capital gains tax, unless an exemption applies that will disregard any capital gain or capital loss. In your circumstances, the main residence exemption has application.

Main residence exemption

You disregard any capital gain or capital loss you make from the sale of a property if:

· There was a dwelling on the property when you sold it;

· The dwelling was your main residence for the whole of the ownership period;

· You did not choose to treat any other dwelling as your main residence under the capital gains tax provisions during your ownership period;

· The property is less than two hectares in size; or the land is a separate pre-CGT asset; and

· The property was not used to earn assessable income whilst you lived there.

Continuing main residence status after dwelling ceases to be your main residence (Absence choice)

In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You can make this choice for a dwelling that you have first occupied as your main residence.

If you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you cease living in it.

Where you use the dwelling to produce income (you rent it out), you can choose to treat it as your main residence while you use it for that purpose for up to six years after you cease living in it. You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be, your main residence.

In your case, the dwelling on block B has and will be your main residence from the time it was constructed sometime after 20 September 1985, until the time you move into the newly constructed dwelling on block A; at which time you will rent the dwelling on block B (for a period of less than six years) and choose to continue to treat the dwelling on block B as your continuing main residence. This means that the period covered by either the absence choice or the period that you actually resided in the dwelling on block B covers your entire ownership period of the dwelling. Therefore the capital gain or capital loss that you make on the sale of block B will be disregarded.

Note: When you make the absence choice, for CGT purposes you cannot treat any other property as your main residence for the same period. This means that the new dwelling on block A will not be exempt when it is sold.