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Edited version of your private ruling
Authorisation Number: 1012515683920
Subject: Capital gains tax - main residence - construction of dwelling - disposal
Question:
Is the capital gain made on the disposal of dwelling 'B' disregarded?
Answer:
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts:
You and your spouse own a property which is situated on two titles.
The property was acquired after 20 September 1985 and is your main residence.
You will demolish the existing dwelling and construct two new dwellings.
You will move into (dwelling A) as soon as construction is complete.
You will sell the other property (dwelling B) after construction is complete.
You will make a capital gain as a result of selling dwelling B.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-150
Reasons for decision:
A capital gain needs to be considered when any disposal, sale or transfer of property occurs. However, there may be exemptions or roll-overs that allow relief from capital gains tax (CGT). Generally you may disregard any capital gain or capital loss realised upon the disposal of a dwelling that was their main residence.
To be eligible for the main residence exemption:
· the dwelling must have been your main residence throughout your ownership period
· the property was not used to produce assessable income, and
· any land on which the dwelling is situated is not more than two hectares.
Generally, if you build a dwelling on land you already own, the land does not start to qualify for the main residence exemption until the dwelling actually becomes your main residence. However, you can choose for the main residence exemption to apply to land while a new dwelling is being constructed.
Where an original dwelling on the land is demolished and a new dwelling is constructed, the exemption is for the shorter of:
· four years before the new dwelling becomes their main residence, or
· the period from when the original dwelling ceased to be occupied.
You can only make this choice if the new dwelling becomes your main residence as soon as practical after the building work is finished, and it continues to be your main residence for at least three months.
In your case, the property was your main residence from the time the property was purchased. As you are also able to claim the main residence exemption during the time the new dwelling was being built provided you move into dwelling A as soon as practical after the building work is finished, and reside there for at least three months, the main residence exemption to CGT will apply to dwelling A.
Disposal of second dwelling
Generally, CGT applies to any change of ownership of a CGT asset. CGT event A1 will occur when you dispose of dwelling B from you to another entity, the time of the event is when you enter into the contract for the sale of the property.
When you sell dwelling B you will need to work out the cost base of the dwelling to enable you to calculate the capital gain as dwelling B was not your main residence.