Edited version of your private ruling

Authorisation Number: 1012463518712

Ruling

Subject: Capital gains tax - main residence

Question and answer:

Do sections 118-150 and 118-155 of the Income Tax Assessment Act 1997 apply to make the property the deceased's main residence from the date of acquisition until their date of death?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts and circumstances:

The deceased purchased property (the property) on which a dwelling was to be built and occupied as the deceased's main residence.

The deceased passed away before any contract for the construction of the new dwelling had been entered into and before any construction works had commenced. Some preliminary work such as having plans drawn up and submitted for approval to Council and engaging land and building surveyors had been undertaken prior to the date of death.

Following the deceased's death the project was abandoned and the property was sold.

The deceased did not occupy the property as their main residence for any period between the time they acquired the property and their date of death.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 118-150.

Income Tax Assessment Act 1997 Section 118-155.

Income Tax Assessment Act 1997 Division 43.

Reasons for decision

Under the capital gains tax (CGT) main residence exemption provisions contained in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997), any assessable gain or loss that an individual taxpayer makes on the disposal of a dwelling that is their main residence is disregarded.

Generally, the main residence exemption is only available for the period a taxpayer occupies a dwelling as their main residence, however, there are some exceptions to this rule, one of which may apply to taxpayers who build a dwelling on land they own.

Under the provisions of section 118-150 of the ITAA 1997, a taxpayer may choose to apply the main residence exemption to land they own if they build a dwelling on the land and that dwelling becomes their main residence as soon as practical after the (building) work is finished and remains their main residence for a period of at least three months. Taxpayer's who are able to make this choice can only do so for the shorter of the period ending four years (or longer if a longer period is allowed by the Commissioner) before the dwelling being built becomes the taxpayer's main residence, or the period from the time the taxpayer acquired the land until the time the dwelling being built becomes the taxpayer's main residence.

It follows that for a taxpayer intending to build on land and wanting to make the choice to apply the main residence exemption under the provisions of section 118-150 of the ITAA 1997 for either of the periods described above, construction of a dwelling must be commenced.

To determine what constitutes 'commencement' in relation to the construction of a building, we must turn to Division 43 of the ITAA 1997 which sets out the rules under which the cost of capital works (which include the cost of construction of buildings) can be deducted.

Section 43-80 of the ITAA 1997 states that capital works are taken to begin when the first step in the construction phase starts and cites the example of the pouring of foundations or the sinking of pilings for a building as the first step in the construction phase of a building.

Where an individual who is building a dwelling on land passes away, the provisions of section 118-155 of the ITAA 1997 may apply to allow the trustee of the deceased's estate to treat the land as if it were the deceased's main residence for the shorter of the four year period preceding death, or the period between the date of acquisition of the land and the date of death. However, for the trustee of a deceased estate to be able to make this choice, certain conditions must be met, including that the deceased must have passed away either after the work began, or after a contract for the building work to be done was entered into.

Application to your circumstances

The deceased purchased property (the property) on which a dwelling was to be built and occupied as the deceased's main residence

The deceased passed away before any contract for the construction of the new dwelling had been entered into and before any construction works had commenced. Some preliminary work such as having plans drawn up and submitted for approval to Council and engaging land and building surveyors had been undertaken prior to the date of death.

The deceased did not occupy the property as their main residence for any period between the time they acquired the property and their date of death.

Considering the above, and applying the principle that construction of buildings commences not upon the commencement of preliminary work such as engaging architects and engineers, but upon the laying of foundations or the sinking of pilings, it cannot be said that the construction of any building was commenced in this case.

As no contract for the construction of the dwellings was entered into, and as it cannot be said construction was commenced, the trustee of the deceased's estate cannot choose to treat the property as if it were the deceased's main residence from the time they acquired it until the date of death.

Conclusion

The trustee of the deceased's estate cannot choose to treat the property as if it were the deceased's main residence from the time the deceased acquired the property until the date of death.