Edited version of private advice

Authorisation Number: 1051742286778

Date of advice: 26 August 2020

Ruling

Subject: Capital gains tax - main residence exemption

Question

Is a partial main residence exemption available to you in respect of the sale of Lot B?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the owner of Lot A and Lot B.

The two lots are under two hectares with a dwelling built over both lots. The dwelling has been your main residence and you do not intend to treat any other property as your main residence.

You will sell Lot B under a contract which provides that completion is to be conditional upon the dwelling being demolished and the boundary realigned. The dwelling will not be demolished until the sale contract is executed but before the settlement date.

Lot B is being actively marketed for sale. You intend to build a new residence on Lot A to reside in.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is their main residence. To qualify for the full exemption, the dwelling must have been your main residence throughout your ownership period and must not have been used to produce assessable income.

Your ownership period is the period on or after 20 September 1985 when you had an ownership interest in the dwelling (section 118-125 of the ITAA 1997). You have an ownership interest in a dwelling for as long as you have a legal or equitable interest in the land on which it is erected (subsection 118-130(1) of the ITAA 1997). For a dwelling where you have a contract for the happening of a CGT event (eg. where you have entered into a contract for its disposal), you have an ownership interest in it until your legal ownership of it ends (subsection 118-130(3) of the ITAA 1997).

In your case, although the CGT event will occur while the dwelling is still your main residence, when the dwelling is demolished it can no longer be your main residence as the exemption attaches to the dwelling and not the land. Your ownership interest will not end until your legal ownership interest ends upon settlement of the contract for the sale of the land. Therefore, as the dwelling will not be your main residence throughout the entirety of your ownership period, it is not considered that you qualify for the full main residence exemption under section 118-110 of the ITAA 1997.

You are able to get a partial exemption for the CGT event that will happen in relation to your dwelling or your ownership interest in it if you are an individual and the dwelling was your main residence for part of your ownership period (section 118-185(1) of the ITAA 1997). You calculate your capital gain or capital loss using the formula:

CG or CL x Non-main residence days

Days on your ownership period

where

·         CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this section.

·         non-main residence days is the number of days in your ownership period when the dwelling was not your main residence.

You can choose to treat the original dwelling as your main residence until it is demolished under section 118-145 of the ITAA 1997 as you will have no other main residence during this time.