Edited version of private advice

Authorisation Number: 1051889908193

Date of advice: 2 September 2021

Ruling

Subject: Main residence exemption

Question 1

Will the Commissioner exercise his discretion and extend the four year period in accordance with subsection 118-150(4)(a) of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Will section 118-42 of the ITAA 1997 apply to disregard any capital gain made on the transfer of your 50% ownership of Unit 1 to your sibling?

Answer

Yes.

Question 3

Will your cost base for the 50% ownership interest in Unit 2 transferred to you from your sibling be the market value of the Unit on the date of transfer?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

You purchased the vacant block of land on XX XXXX 20XX with your sibling, with equal shares as tenants in common.

You lodged multiple applications to have a Tree removed from the land over the period, these were refused by the Council.

You lodged a development application to the Council on XX XXXX 20XX, which was refused on XX XXXX 20XX.

You appealed this decision, and the decision to uphold the application refusal issued on XX XXXX 20XX.

You obtained an Assessor certificate for multiple dwellings on XX XXXX 20XX.

You lodged a second development application on XX XXXX 20XX.

This application was approved on XX XXXX 20XX.

Preparation of the property for construction commenced on XX XXXX 20XX, which included multiple complex steps to be undertaken, this process took until XX XXXX 20XX to complete all the required steps.

You lodged an amendment to your development application on XX XXXX 20XX, this was approved on XX XXXX 20XX.

You lodged a further amendment to your development application on XX XXXX 20XX, this was approved on XX XXXX 20XX.

Construction began in XXXX 20XX, this took a significant amount of time.

A fire safety certificate was refused on XX XXXX 20XX, this was rectified prior to the final occupancy certificate being issued.

On XX XXXX 20XX it was discovered there was an issue with the property, and another amendment to the development application was lodged on XX XXXX 20XX.

This amendment was approved on XX XXXX 20XX.

A strata subdivision application was lodged on XX XXXX 20XX, to create two units on the Property, Unit 1 and Unit 2.

Your sibling will reside in Unit 1 and you will reside in Unit 2.

The strata subdivision was approved on XX XXXX 20XX.

The final occupancy certificate was issued on XX XXXX 20XX.

You moved into the property on XX XXXX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-142

Income Tax Assessment Act 1997 section 118-150

Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011

Question 1

Reasons for decision

The most common capital gains tax event (CGT event A1) happens if an individual disposes of a CGT asset to another entity. The time of the event is when the contract for the disposal is entered into, or if there is no contract, when the change of ownership occurs.

Main residence exemption

Generally, you can disregard a capital gain or capital loss made on the disposal of a property that is your main residence if:

•         the property was your home for the whole period you owned it

•         the property was not used to produce assessable income while you were living there, and

•         any land on which the dwelling is situated is not more than two hectares.

Section 118-150 of the Income Tax Assessment Act 1997 extends the CGT main residence exemption to allow you to treat land as your main residence for up to four years if you build, repair or renovate a dwelling on the land that subsequently becomes your main residence.

Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011 amended section 118-150(4) of the ITAA 1997 to give the Commissioner a discretion to extend this period where a taxpayer does not build, repair or renovate a dwelling and establish it as their main residence within four years. The amendment received Royal Assent on 27 June 2011 and applies to CGT events that happen after that date.

The Commissioner would be expected to exercise the discretion in situations such as the following:

•         When the taxpayer is unable to build, repair or renovate the dwelling within this time period due to circumstances outside their control. For example, the relevant builder becomes bankrupt and is unable to complete the building, repairs or renovations.

•         When the taxpayer is unable to build, repair or renovate the dwelling due to unforeseen circumstances arising during this period. For example, the taxpayer or a family member has a severe illness or injury.

•         In circumstances when building, repairing or renovating the dwelling within the four years would impose a severe financial burden on the taxpayer. For example, the taxpayer would be required to incur an excessively high level of debt relative to their income. Consequently, the taxpayer may spend time accumulating sufficient savings (relative to their income) to build, repair or renovate a reasonable dwelling relative to their circumstances.

Based on the facts you have provided; we consider there have been circumstances outside your control which prevented you from completing the building of your dwelling within the four year period. It is considered appropriate for the Commissioner to exercise the discretion provided under subsection 118-150(4) of the ITAA 1997 in this situation.

Question 2

Section 118-42 of the ITAA applies to disregard a capital gain or loss if you own land on which there is a building and you subdivide the building into stratum units and transfer each unit to the entity who had the right to occupy it just before the subdivision.

In your circumstances you and your sibling had an agreement where your sibling would occupy Unit 1 of the building, and you would occupy Unit 2. You applied to have a strata subdivision of the building on the Property, which you and your sibling owned as tenants in common, this application was approved. You transferred your 50% ownership in Unit 1 to your sibling on XX XXXX 20XX, therefore section 118-42 of the ITAA 1997 applies to disregard any capital gain or loss related to this transfer.

Question 3

Section 112-20 of the ITAA applies and the first element of your cost base is taken to be market value of the asset at the date of acquisition if you do not receive funds for the transfer of a CGT asset; and CGT event D1 did not happen or another entity did something which does not constitute a CGT event happening; or some or all of the expenditure you incurred to acquire it cannot be valued; or you did not deal at arm's length with the other party.

In your circumstances your sibling transferred you their 50% ownership interest in Unit 2, in exchange for your 50% ownership in Unit 1. As you dealt at arm's length with your sibling and, the transfer of these titles is a CGT A1 event, and the properties can be valued, subsection 112-20(1) of the ITAA 1997 will apply. Therefore, the first element of your cost base for the 50% portion of Unit 2 you received from your sibling will be market value of the Unit on the date of transfer.