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Subject: Capital gains tax - main residence - absence choice

Question

Is their a minimum period that a newly constructed dwelling must be your main residence to obtain a CGT exemption?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

I July 2011

Relevant facts

You currently reside with your family in rented accommodation.

You purchased a block of land after 19 September 1985.

You signed a contract to construct a property on the land.

Construction of your new property has commenced and is due for completion.

You have had all the essential services connected and they are in your name.

Once you receive an occupancy certificate from your Local Council you plan to move into the dwelling with your family.

You will then complete extra tasks around the property.

Due to a change in your circumstances you will sell the property after occupying for a period of more than three months.

Relevant Legislative provisions

Income Tax Assessment Act 1997 Section 118-150.

Income Tax Assessment Act 1997 Paragraph 118-150(3)(a).

Income Tax Assessment Act 1997 Paragraph 118-150(3)(b).

Income Tax Assessment Act 1997 Section 118-145.

Reasons for decision

Capital Gains Tax

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) occurs to a capital asset. The disposal of the dwelling, which is a CGT asset, causes a CGT event A1 to occur under the Income Tax Assessment Act 1997 104-10. (ITAA 1997). You dispose of an asset when a change of ownership occurs from you to another person or entity.

The main residence exemption under Subdivision 118-B of the ITAA 1997 is generally available to a taxpayer if a property is actually used or occupied as a main residence under section 118-110 of the ITAA 1997. However, in some circumstances, the exemption can be extended to the period before and/or after the dwelling actually becomes a taxpayer's main residence.

Section 118-150 of the ITAA 1997 deals with building, repairing or renovating a dwelling on land in which a taxpayer has an ownership interest. Under section 118-150, a taxpayer can choose to extend the main residence exemption for the dwelling to include the shorter period of:

§ 4 years before the dwelling becomes the taxpayer's main residence; or

§ the period starting from when the taxpayer acquired their ownership interest in the land and ending when the dwelling becomes their main residence.

However, the taxpayer can make this choice only if the dwelling:

§ becomes their main residence as soon as practicable after the dwelling is built, repaired or renovated (paragraph 118-150(3) (a) of the ITAA 1997); and

§ continues to be their main residence for at least 3 months (paragraph 118-150(3) (b) of the ITAA 1997).

For the purposes of paragraph 118-150(3)(b) of the ITAA 1997, once main residence has been established, there are two ways in which it can continue. Firstly, it continues for as long as the owner actually maintains the dwelling as his or her main residence. Secondly, where the owner chooses, it continues for a further period after actual residence ceases (section 118-145 of the ITAA 1997). Both of these periods are taken into account in determining whether the three month requirement in paragraph 118-150(3) (b) is satisfied.

You are also able to rely on Section 118-145 (1) which provides that you can continue to treat a property as your main residence even though you no longer reside in the property, in certain circumstances.

Subsection 118-145(2) provides that if the property is used to produce assessable income then the period is six years.

Subsection 118-145(3) provides that if the property is not used for this purpose then the period is indefinitely.

Subsection 118-145 (4) provides that you cannot treat another property as your main residence during this period except if section 118-140 applies.

Conclusion

You have bought a block of land and are in the process of having a house built. You intend to live in the property for a period of time and to undertake some final works to the property. You have had the essential services connected and they are in your name. You intend to move to another property closer to your child's school so as to reduce the travelling time.

You will not be subject to capital gains tax once you move into the property and occupy the property for a period of more than three months under the provisions of paragraphs 118-150(3)(a) and 118-150 (3) (b) of the ITAA 1997.