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Edited version of your written advice
Authorisation Number: 1013134488971
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You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
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Date of advice: 9 December 2016
Ruling
Subject: Property Subdivision, main resident exemption
Question 1
Will the Taxpayers be eligible for the main residence exemption when you transfer their dwelling to the trust?
Answer
Yes
Question 2
Will the Taxpayers be able to treat the newly transferred dwelling you receive from the trust as your main residence from the time you move into it?
Answer
Yes
This ruling applies for the following periods:
1 July 2016 to 30 June 201X
1 July 2017 to 30 June 201X
1 July 2018 to 30 June 201X
The scheme commences on:
1 July 201X
Relevant facts and circumstances
The Taxpayers own land and a dwelling (the property).
The property was purchased in the early 1990s and has been the Taxpayers place of residence for the entire time they have owned it. The property is valued at around $X.Xmillion.
The Taxpayers wish to downsize their property now their children no longer live at home. They also wish to use the surplus area for investment purposes.
The Taxpayers will sell the property to their family trust (the Trust). The transfer will take place for no value.
The Trust has as beneficiaries the Taxpayers, their children and grandchildren.
The Trust will demolish the dwelling. Then the Trust will subdivide the land into two.
The Trust will build X new dwellings on the subdivided land..
The building work will be carried out by an unrelated builder. The Taxpayers expect the builder to begin work in early 201X.
The development is estimated to cost an amount. The development will be financed by loans from the taxpayers and supplemented with bank loans. The Taxpayers estimate the new dwellings will each be valued at a similar amount to the original dwelling.
As soon as the development is complete, the Trust will transfer one dwelling back to the Taxpayers. The transfer will take place for no value. The Trust will not make a profit on the transfer.
The Taxpayers will move into the dwelling as soon as they take ownership. The dwelling will become their main residence. The Taxpayers will have no other main residence during this period.
The Trust will keep ownership of the remaining land and dwelling. The Trust will hold the dwelling as a long term investment for more than X years, collecting rental income.
The Taxpayers and their associates have no history of prior property development
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-5
Income Tax Assessment Act 1997 Section 112-20
Income Tax Assessment Act 1997 Section 116-30
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-135
Reasons for decision
Question 1
Summary
The taxpayers are eligible for a main residence exemption when they transfer their dwelling to the trust.
Detailed reasoning
The taxpayers have treated the dwelling as their main residence since they acquired it. Accordingly they are eligible for the main residence exemption and may disregard any capital gain on the sale.
When the taxpayers transfer the property to the trust, they will transfer it at no value. This will be a non-arm's length transaction with a related party. The taxpayers will be deemed to have disposed of the dwelling at market value (s116-30 ITAA 1997). However, because the property is their main residence, they will be able to disregard any gain that they are deemed to make on the disposal. (s118-110 ITAA 1997). The Trust will acquire the property with a cost base of the market value at the time of transfer, plus associated costs of transfer that are paid for by the Trust.
Question 2
Summary
The taxpayers will be able to treat the newly acquired dwelling as their main residence from the time they move into it.
Detailed reasoning
The taxpayers will be eligible to treat the new dwelling and the adjacent land that they receive from the Trust as their main residence from the moment they move into it. If the taxpayers move into it as soon as is practicable after the trust transfers ownership to them, they will be able to treat it as their main residence from the time ownership is transferred (s118-135 ITAA 1997). As soon as practicable is taken to mean as soon as it is owned and able to be occupied. It would be expected that the taxpayers would move in within days of the settlement of the contract for transfer, unless for some reason the dwelling was not yet fit for habitation.