Edited version of private advice

Authorisation Number: 1051943434903

Date of advice: 31 January 2022

Ruling

Subject: Sale of main residence

Question 1

Is the sale of Property X/B considered to be part of the carrying on of a property development business or an isolated profit-making transaction?

Answer

No.

Having regard to the indicators of a business and an isolated profit-making transaction, it is considered that neither was carried on with respect to the property in question. Therefore, any gain from the sale of the property is not assessable for income tax as ordinary income. For more information, see Taxation Rulings TR 97/11 for indicators of a business and TR 92/3 for indicators of an isolated profit-making transaction.

Question 2

Can you choose to claim a full main residence capital gains tax (CGT) exemption with respect to the sale of Property X/B?

Answer

Yes.

Under section 118-150 of the Income Tax Assessment Act 1997, where a newly constructed dwelling was built to replace a previous dwelling that was destroyed, you can get a full exemption on the disposal of the property if:

•         the original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income, and it was on land covering an area of two hectares or less

•         the new dwelling became your main residence as soon as practicable after it was completed, it continued to be your main residence until you disposed of it, and that period was at least three months

•         you make a choice to treat the vacant land and new dwelling as your main residence in the period starting when you stopped occupying the previous dwelling and ending when the new dwelling became your main residence, and this period was four years or less

•         you disposed of the land and new dwelling together.

If you make the choice to treat the property as your main residence during the period Property X/B was being constructed (that is, dot point 3 above), you will meet all the requirements to claim a full main residence CGT exemption with respect to the sale of Property X/B.

However, you should note that for the period you treat Property X/B as your main residence, you cannot treat any other dwelling as your main residence for CGT purposes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased Property X on xx/xx/xxxx. You moved in and lived at the property as your primary residence from the settlement date onwards. The property is less than two hectares in area.

On xx/xx/xxxx, tradesmen working on the dwelling caused a fire which resulted in it being destroyed.

You have taken legal action but this is ongoing due to significant delays.

You were granted permission by the local council to build a dual occupancy with Torrens title subdivision.

Your intent was to live in one and rent out the other.

You have never worked in the building and construction or property development industries. You engaged a builder to construct the dwellings on Property X/A and Property X/B.

On building completion, you moved into Property X/B and rented out Property X/A.

However, due to your accumulated debt resulting from the legal costs incurred in your ongoing legal action and a large capital loss suffered on the sale of another property, you were forced to reconsider the feasibility of retaining both properties.

You decided to sell Property X/B. This occurred on xx/xx/xxxx.

You had lived in Property X/B for at least three months.

You then stayed with family and will continue to do so until the lease on Property X/A expires at which time you intend to move into Property X/A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 subsection 118-150(5)