Edited version of your written advice

Authorisation Number: 1012791888150

Ruling

Subject: CGT event A1 - disposal of a CGT asset

Question 1

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

Answer

No.

Question 2

Can you elect to apply the main residence exemption to your current dwelling for the entire ownership period?

Answer

Yes.

Question 3

Can you elect to apply the main residence exemption to your proposed dwelling for the entire ownership period?

Answer

No.

Question 4

Can you elect to apply the main residence exemption to your proposed dwelling for the entire ownership period if you transfer half the title to your spouse?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2015.

Year ending 30 June 2016.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

In the 1995-96 financial year you purchased a residential block (title in your name only). At that time, you were living in a dwelling purchased prior to 1985.

Shortly after acquisition you subdivided the block into three separate titles and sold one, leaving one block split over two separate titles (still in your name only).

In respect of the title that was sold, a capital gain was included in your tax return.

You built a house (Dwelling A) and immediately upon completion, you and your family moved in, in the 1998-99 financial year. Dwelling A has been your main residence since then. You built Dwelling A exclusively on one title.

You now wish to build a smaller house (Dwelling B) on your second title and sell Dwelling A. It was always your intention to build a smaller house with fewer stairs for your retirement, and you have no intentions of disposing of Dwelling B in your lifetime.

There are not separate notices for water and sewer rates. Council has always billed your two titles as one block.

You have also treated the block as one; parking private motor vehicles on it. Until recently you have maintained shrubs on the second title, and mown the grass for your family's private and domestic use. This title comprises your yard.

Once Dwelling B is complete, you propose to sell Dwelling A and move into Dwelling B.

You intend to move into Dwelling B as soon as practicable after it is completed.

You also propose to include your wife on the title, with the effect being that you own Dwelling B jointly: 50/50.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 112-25.

Income Tax Assessment Act 1997 section 115-10.

Income Tax Assessment Act 1997 Subdivision 118-B.

Income Tax Assessment Act 1997 section 118-110.

Income Tax Assessment Act 1997 section 118-115.

Income Tax Assessment Act 1997 section 118-140.

Income Tax Assessment Act 1997 section 118-145.

Income Tax Assessment Act 1997 section 118-150.

Income Tax Assessment Act 1997 section 118-165.

Income Tax Assessment Act 1997 section 118-185.

Income Tax Assessment Act 1997 section 118-195.

Reasons for decision

Subdivision of land

Section 112-25 of the Income Tax Assessment Act 1997 (ITAA 1997) states that subdivision of land is 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.

Taxation determination TD 1997/3 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 exemption

Subdivision 118-B of the ITAA 1997 can disregard a capital gain or capital loss that happens to a dwelling that is a main residence.

To get the full exemption from CGT:

• the dwelling must have been your home for the whole period you owned it

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

• any land on which the dwelling is situated must be 2 hectares or less.

Section 118-115 of the ITAA 1997 includes a dwelling to be a unit of accommodation that is a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation.

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 enable you to treat a residential property as your main residence at a time when you are not actually living there.

Rules extending main residence exemption - changing main residences

Section 118-140 of the ITAA 1997 (about changing main residences) 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, it is the last six months of dual ownership that you can treat them both as your main residences.

This rule only applies if the taxpayer's existing main residence was the taxpayer's main residence for a continuous period of at least three months in the twelve months before it was disposed of and it was not used for income-producing purposes in any part of that twelve month period when it was not the taxpayer's main residence.

Rules extending main residence exemption - building a dwelling

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, under Section 118-150 of the ITAA 1997 the main residence exemption may be applied to land if you build a dwelling that you move into (it becomes your main residence) as soon as practicable after completing construction and which continues to be your main residence for at least three months.

This choice is limited to the shorter of:

• 4 years before the dwelling becomes your main residence

• the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.

Rules extending main residence exemption - absence rule

As a general rule, a dwelling is no longer your main residence once you stop living in it. However, under section 118-145 of the ITAA 1997, you can continue to treat a dwelling as your main residence for CGT purposes even though you no longer live in it.

If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a six month period if section 118-140 of the ITAA 1997 applies).

If you do not use it to produce income (for example, you leave it vacant, or use it as a holiday home) you can treat the dwelling as your main residence for an unlimited period after you cease living in it. If you use the dwelling to produce income (for example, you rent it out or it is available for rent) you can choose to treat it as your main residence for up to six years after the day you cease living in it.

Question 1

In your case, you acquired your block of land in the 1995-96 financial year. You built Dwelling A on one title and moved in immediately upon completion of construction in the 1998-99 financial year. Since your previous main residence was a dwelling purchased prior to 20 September 1985, you may choose to treat Dwelling A as your main residence from the acquisition date of the land under section 118-150 of the ITAA 1997.

You now want to build Dwelling B on the second title of land, with the intention of this becoming your new main residence. Taxation Determinations TD2000/13 and TD 2000/14 conclude that where you build another dwelling on subdivided vacant land and this then becomes your main residence, whether the dwellings are sold under a single contract of sale or under separate contracts of sale, you are not entitled to the full main residence exemption for both dwellings.

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.

Questions 2 & 3

If Dwelling A is sold six months (or less) after you move in to Dwelling B,
AND you do not elect to apply section 118-150 of the ITAA 1997 (you choose to treat Dwelling B as your main residence WHEN you move in):

If you do not elect to apply section 118-150 of the ITAA 1997, you can only treat Dwelling B as your main residence when you actually move in as your main residence. It is not your main residence for the whole of its ownership period, even taking into consideration the six months when you change main residences.

The period from when you acquired the land in the 1995-96 financial year until the date you move into Dwelling B will not be exempt from capital gains for Dwelling B - as long as you own both main residences for a maximum of 6 months only. If you own both dwellings for greater than six months, there will be further periods that Dwelling B will not be exempt from capital gains (explained below).

By choosing this option under these conditions, you will be eligible for the full main residence exemption on Dwelling A provided that it is sold within six months of you moving into Dwelling B.

If Dwelling A is sold more than six months after you move in to Dwelling B, AND you do not elect to apply section 118-150 of the ITAA 1997 (you choose to continue to treat Dwelling A as your main residence until it is disposed of):

You can make to choice under section 118-145 of the ITAA 1997 to continue to treat Dwelling A as your main residence even after you move into Dwelling B. As you have not indicated that you intend to rent Dwelling A out prior to its disposal, you can make this choice indefinitely. Accordingly, you could elect that Dwelling A is covered by the main residence exemption for your entire period of ownership.

If you make this choice, Dwelling B can only begin to be treated as your main residence for CGT purposes from the date that is six months before you dispose of Dwelling A (as per section 118-140 of the ITAA 1997).

Note: if your circumstances change, and you rent Dwelling A out prior to its sale, you can only make the choice under section 118-145 of the ITAA 1997 for a maximum of six years.

If you choose to treat Dwelling B as your main residence BEFORE you move in:

If you elect to apply Section 118-150 of the ITAA 1997, you can treat Dwelling B as your main residence for up to four years prior to actually moving in. However, you cannot treat block A as your main residence for this period of time even if you were still residing there - except for the last six months period when you owned both main residences. You would only be eligible for the main residence exemption for Dwelling A from the date of acquisition until 3.5 years before you moved in to Dwelling B (changing residences) - as long as you own both main residences for a maximum of 6 months only. For example: you acquire Dwelling A house and land in January 2000, you build and move in to Dwelling B in June 2015, and you apply the four year rule which takes your main residency start date for Dwelling B back to June 2011. Therefore from January 2000 to December 2011 (June 2011 plus the six month change residency rule) you will be exempt from capital gains for Dwelling A.

You would not qualify for the main residence exemption for Dwelling B for the period prior to the four year period, going back to the date of acquisition of the land. From example above: from January 2000 to June 2011 you will not be exempt from capital gains for Dwelling B.

Regardless of whether you elect to apply Section 118-150 of the ITAA 1997 to Dwelling B or not, Dwelling B will only be your main residence for part of your entire ownership period. Therefore, you will only be entitled to a partial main residence exemption if/when you dispose of it under section 118-185 of the ITAA 1997.

Question 4

If 50% of your ownership interest is disposed of after moving into Dwelling B a partial exemption will be available. Where a dwelling was your main residence for only part of your ownership period, subsection 118-185(2) of the ITAA 1997 provides the following calculation to be used in determining your assessable capital gain or loss:

If you transfer half of the title prior to moving in, you will not be exempt from any capital gains.

If you chose to treat Dwelling A as your main residence until it is disposed of (where it takes more than six months to dispose of):

Your non-main residence days for Dwelling B will include the period from acquisition until the date that is six months before you dispose of Dwelling A.

If you chose to treat Dwelling B as your main residence WHEN you move in (where is takes six months or less to dispose of):

Your non-main residence days will include the period from acquisition until you move into Dwelling B.

If you chose to treat Dwelling B as your main residence BEFORE you move in:

Your non-main residence days will include the period from acquisition up until 4 years prior to Dwelling B became your main residence (if you have chosen section 118-150 of the ITAA 1997 to apply to Dwelling B).

If you do elect to apply this provision, you also must have moved in to Dwelling B as soon as practicable after its completion and retain this as your main residence for at least three months prior to transfer of title.