Edited version of your private ruling

Authorisation Number: 1012593821242

Ruling

Subject: Capital gains tax - main residence, subdivision and disposal

Question 1:

Can you apply the main residence exemption for the entire ownership period to both properties after subdivision?

Answer:

No.

Question 2:

Can you elect to apply the main residence exemption to apply the main residence exemption on the front property for the entire ownership period?

Answer:

Yes.

Question 3:

Can the main residence exemption apply to both properties for a maximum period of six months?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own a property.

The property is your main residence.

You are going to subdivide the property into two blocks (block A and block B).

Your existing dwelling will be situated on block A.

You are going to construct your new main residence on block B.

You will dispose of block A within six months of moving into the new dwelling on block B.

You will establish block B as your main residence.

Block B will be your main residence for a period of more than 12 months.

You will dispose of block B in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-140

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

The most common capital gains tax (CGT) event (CGT event A1) happens if you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

CGT event A1 will occur upon the disposal of block A and block B.

Subdivision of land

Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title.

The acquisition date of the subdivided block will be your original purchase date.

However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis.

The enclosed Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis.

Main residence

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your main residence. To get the full exemption from CGT: 

n the dwelling must have been your home for your entire ownership period

n you must not have used the dwelling to produce assessable income, and

n any land on which the dwelling is situated must be two hectares or less.

For the main residence purposes, the ownership period of a residential property runs from when you obtain legal ownership of it until that legal ownership ends.

In general, you can only have one main residence at any one time, which will be where you are living. However, there are a number of main residence provisions that can treat a residential property as your main residence at a time when you are not actually living there.

Changing main residences

The changing of main residences provision treats both properties as your main residence for a maximum period of six months. If the period that you own both properties exceeds six months, you treat the new property as your main residence for the last six months that you also owned the former property.

Construction of dwelling

One of these provisions that can apply is if you build a dwelling on land you own. Generally, if you build a dwelling on land you already own, the land does not qualify for an exemption until the dwelling actually becomes your main residence.

However, you can choose to treat the land as your main residence for the shorter of four years before the dwelling actually becomes your main residence or the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.

You can only make this choice if the dwelling you build becomes your main residence as soon as practicable after the work is finished and it continues to be your main residence for at least three months.

Taxation Determinations TD 2000/13 and TD 2000/14 discuss the application of the CGT provisions to arrangements similar to those which you are planning to undertake. Copies of these determinations are enclosed for your reference.

How these determinations apply to your situation

Taxation Determination TD 2000/13

This is where you do not elect to treat block B as your main residence before you move into it. By making this election this entitles you to the full main residence exemption on the disposal of block A for your entire ownership period.

However, you will only be entitled to a partial main residence exemption on the disposal of block B, even taking into consideration the six months when you changed main residences. You will not qualify for the main residence exemption for the period starting from when you acquired the property to the time you moved into block B.

Taxation Determination TD 2000/14

This is where you elect to treat block B as your main residence prior to the time that it actually becomes your main residence.

From the time you choose to treat block B as your main residence, you cannot treat block A as your main residence even though you were still residing there except for the six months when you changed main residences.

Therefore, block B will be taken to be your main residence up to four years prior to it actually became your main residence. If you elect block B as your main residence on the date you move in, it can be treated as your main residence for a period of up four years. You would not qualify for any exemption for the period prior to the four year period if you acquired the property before that.

Regardless of what choice you make block B will be your main residence for only part of your ownership period. Therefore, you will be entitled to a partial main residence exemption upon disposal.

Further information is available on our website - www.ato.gov.au.