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Ruling

Subject: Commissioner's discretion to extend the 4 year period to build, renovate or repair a home on land that you own

Question and answer:

Will the Commissioner exercise his discretion and extend the 4 year period in accordance with subsection 118-150(4)(a) of the Income Tax Assessment Act 1997?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You signed a contract to purchase a block of land not exceeding 2 hectares in size, in a residential estate in the 2001-02 income year.

You borrowed funds to purchase this land which you repaid within XX months, exhausting your savings.

Neither you nor your spouse have ever owned any other land, house, unit, apartment or any other dwelling.

You have no other money other than what is deposited in your savings account.

The block of land is the only real asset you have ever owned.

You purchased the land with only one intention which was to build your family home one day to live in, once you saved a sufficient building deposit.

The reason you didn't buy a house and land package instead of the land was that you did not have enough money. You could afford the land which was a start to owning a home to live in.

After acquiring the land you wanted to save a reasonable deposit to build your home as you did not want to place your family into a huge debt situation which may have placed you in the situation of losing your home due to bankruptcy.

You informally approached sales representatives of builders at display home centres on an average once every year from when you acquired the land but you decided you could not afford the cost of the house once the salesperson told you the cost.

The difficulty in having a house built on the land between during the 4 years after acquiring the land was:

1. The price to build houses escalated over the years.

2. On your pay it took you years to save a sufficient deposit to build the house.

3. Your wife arrived from overseas and you were married in the 2006/07 income year. Your finances were placed under pressure due to paying expenses such as airfares and living expenses for her.

4. Your fortnightly income after expenses (including loan repayments for the land), did not leave you much to live on.

It took you over X years to save sufficient funds to build a house.

The reason you were eventually able to build a house was because your wife started to work and gave all her money to help build the family home.

You sought a plan and quotation from a builder in the 2008-09 income year. The quote was provided later that same income year.

You formally entered into the contract to build a house on the land in the 2009-10 income year once all outstanding matters had been agreed to.

The contract price was subject to change.

The loan amount for the home had to be kept low enough for you to afford the loan repayments on one salary as you were attempting to start a family and your spouse would have to give up work.

The building started approximately X month/s after signing the contract and was handed over to you later in the same income year.

Some minor exterior work was completed and you and your spouse moved into the house as soon as practicable after the works were completed.

You intend to live in the house for a couple of years at least but will have to sell the home eventually if you have children or your health falters.

Upon confirming the exemption you intend to transfer half the house into your wife's name so you will be joint tenants.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-150

Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Capital gains tax

Section 100-10 explains that capital gains tax (CGT) is income tax paid on any net capital gain made as the result of a CGT event taking place. CGT events are the different types of transactions that may result in a capital gain or capital loss. As a general rule whenever a CGT asset, such as property, that was acquired after 20 September 1985 (post-CGT), is sold (or otherwise disposed of) as part of a CGT event, the vendor will be subject to the CGT provisions and will need to determine whether a capital gain or capital loss has resulted.

Any capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains.

This type of event is known as CGT event A1 and it happens whenever there is a change in ownership of a CGT asset from one entity to another.

When you change the ownership of your property by adding your spouse as a joint tenant, CGT event A1 will occur.

Main residence exemption

Exemptions from CGT are set out in Division 118.  In particular, the main residence exemption provisions start at section 118-110. Usually, if you are an individual (not a company or trust) you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (also referred to as your home).

Section 118-150 extends the CGT main residence exemption to allow you to treat land as your main residence for up to four years if you build, repair or renovate a dwelling on the land that subsequently becomes your main residence.

Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011 amended section 118-150(4)(a) to give the Commissioner a discretion to extend this period where a taxpayer does not build, repair or renovate a dwelling and establish it as their main residence within four years. The amendment received Royal Assent on 27 June 2011 and applies to CGT events that happen after that date.

The Commissioner would be expected to exercise the discretion in situations such as the following:

· When the taxpayer is unable to build, repair or renovate the dwelling within this time period due to circumstances outside their control. For example, the relevant builder becomes bankrupt and is unable to complete the building, repairs or renovations.

· When the taxpayer is unable to build, repair or renovate the dwelling due to unforeseen circumstances arising during this period. For example, the taxpayer or a family member has a severe illness or injury.

· In circumstances when building, repairing or renovating the dwelling within the four years would impose a severe financial burden on the taxpayer. For example, the taxpayer would be required to incur an excessively high level of debt relative to their income. Consequently, the taxpayer may spend time accumulating sufficient savings (relative to their income) to build, repair or renovate a reasonable dwelling relative to their circumstances.

After X years of saving you purchased a vacant block of land not exceeding 2 hectares in size under a contract in the 2001-02 income year with an intention of building your home. After clearing the mortgage on the land within XX months you had exhausted your savings and you were not able to accumulate sufficient savings to commence building your home within 4 years of acquiring the land. You then needed longer than the 4 year period to save sufficient funds to begin building your home.

Your financial position was exacerbated in 2006-07 when you were married and you faced the expense of bringing your spouse from overseas and supporting her until she commenced working. Your spouse then started contributing to your savings.

Neither you nor your spouse had any other assets, nor have you owned any other property.

It was not until the 2008-09 income year that you were in a financial position to proceed with building your house. You sought a plan and quotation from a builder and after all outstanding matters had been agreed to, you signed a contract with the builder in the 2009-10 income year.

You state that if you had commenced building within the 4 year period it would have imposed a severe financial burden on you relative to your income at the time.

Based on the facts you have provided, it is considered appropriate for the Commissioner to exercise the discretion provided under subsection 118-150(4)(a). The ownership interest in your home that is to be transferred to your spouse will be exempt under the CGT main residence exemption.