Edited version of private advice

Authorisation Number: 1051992078171

Date of advice: 24 June 2022

Ruling

Subject: CGT - main residence

Question

Are you able to claim the full main residence exemption on the sale of the property under section 118-145 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

Sometime ago you purchased a property (dwelling).

You paid for the dwelling via an owner-occupied loan.

You did not move into the dwelling as you believed the dwelling was derelict and too small for your family.

The tenants were allowed to stay in the dwelling after you had purchased it.

A rental agreement was signed.

Soon after you purchased the dwelling a survey was completed so you could engage a building designer.

A few months later you received a quote for the building design.

You commenced council and planning applications for the construction of a new dwelling on the property.

Approximately 12 months after purchase the tenants vacated the dwelling.

Your architect went back and forth with council numerous times, to ensure that everything was approved first time.

Due to the lengthy process of complying with council regulations, your submission was 12 months after the purchase of the dwelling.

During this time, you rented other accommodation.

A few months after the tenants vacated the dwelling the final Development Application (DA) was issued.

The DA delays were out of your control.

Shortly after DA approval building works commenced on the dwelling.

Just before the completion of the building works you moved into the dwelling.

Approximately two years after you purchased the dwelling the building was completed.

Approximately seven years after you purchased the dwelling, the dwelling was sold and settled.

Your intention when taking out the loan and when purchasing the dwelling was always as an owner occupier and the dwelling to be your principal place of residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a Capital Gains Tax (CGT) event occurring. The most common CGT event, CGT event A1, occurs when you dispose of a CGT asset to someone else. For example, if you sell a property, land and dwellings are CGT assets.

Under section 118-110 of the ITAA 1997, you can generally disregard any capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it when:

•         the dwelling was your home for the whole period you owned it;

•         the dwelling was not used to produce assessable income; and

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

You are only able to treat one dwelling as your main residence at any time (apart from limited circumstances where you are changing main residences).

You only get a partial exemption for a CGT event that happens in relation to your ownership interest in a property if the dwelling was your main residence for only part of your ownership period.

A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time.

If you purchased the dwelling this would generally be the date of settlement of the purchase contract. However, if there is a delay in moving in because of illness or other unforeseen circumstances, the exemption may still be available from the time you acquired your ownership interest in the dwelling.

ATO ID 2001/744 Income tax: Capital gains tax: moving into a dwelling (ATO ID 2001/744), explains that if you could not move into a property because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest. A mere intention to occupy a dwelling as your main residence - without actually doing so - is not sufficient to obtain the exemption. Whilst ATO ID 2001/744 has been withdrawn, the views expressed in it is still current and representative of the Commissioner's view.

Section 118-145 of the ITAA1997 (absence rule)

Section 118-145 of the ITAA1997 provides that if a dwelling was your main residence, you can choose to continue treating that dwelling as your main residence for capital gains tax (CGT) purposes even though you no longer live in it.

Generally, you:

•         can treat the dwelling as your main residence for:

• up to six years if it is used to produce income
• indefinitely if it is not used to produce income

•         can't treat any other dwelling as your main residence for that period (except for a limited time if you're moving house).

You can't make this choice for a period before a dwelling first becomes your main residence; nor can you make this choice until such time that you cease living in the dwelling.

In your case you purchased the property with the intention of it being your main residence. As you believed the property to be derelict and too small for your family to live in a decision was made to demolish the existing dwelling and build a new family home.

As the development application process was taking longer than you expected you allowed the tenants to remain in the property while you rented other accommodation.

As stated in ATO ID 2001/744 if you could not move into the property because it was being rented out, you are not considered to have moved into the property as soon as practicable after you acquired it.

You can only make the absence choice under section 118-145 of the ITAA 1997 after you have move into the property and treated it as your main residence.

As you did not move into the property and treated it as your main residence until after the new dwelling was completed you are unable to apply the absence choice from the date the property was purchased until the date you moved into the property.

Therefore, you are unable to claim a full main residence exemption under the absence choice on the sale of the property.

Section 118-150 of the ITAA1997 (build, repair or renovate)

Section 118-150 of the ITAA 1997 allows for the extension of the 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.

Section 118-150 of the ITAA 1997 provides that where you acquired an ownership interest in land and then built a dwelling, you can choose the dwelling to be your main residence from the time you acquired your ownership interest in the land, as long as the dwelling became your main residence as soon as practicable after the construction was finished, and it continued to be your main residence for at least three months.

There is a time limit during which the choice can operate. This is the shorter of four years before the dwelling becomes your main residence, or the period starting from when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.

Once you make the choice, no other dwelling can be treated as your main residence during that period.

Paragraph 118-150(5) of the ITAA 1997 states if there was already a dwelling on the land when you acquired your ownership interest in it and you or someone else occupied it after that time, your ownership interest starts when the dwelling ceases to be occupied.

In your case the tenants remained in the property for approximately 12 months from the time you purchase the property.

In this regard you are able to treat the property as your main residence for up to four years from the time the property became vacant as long as the dwelling became your main residence as soon as practicable after the construction was finished, and it continued to be your main residence for at least three months.

In the present case you moved into the property as soon as practicable after the construction was finished and remained in the property as your main residence until it was sold.

As the construction of the dwelling was completed within the four-year period, you are able to use section 118-150 of the ITAA 1997 to apply the main residence exemption to the property.

Under section 118-150 of the ITAA 1997 the property will be considered your main residence from the date the property became vacant until the date you moved into the property.

Conclusion

Given you are unable to apply the absence rule until after you moved into the property and section 118-150 of the ITAA 1997 doesn't apply until after the property becomes vacant, you are not entitled to apply the full main residence exemption on the sale of the property.

You are however able to apply a partial main residence exemption from the time the property became vacant until settlement occurred on the property.

Other relevant comments

If a CGT event happens to a dwelling you acquired on or after 20 September 1985, and that dwelling was not your main residence for the whole time you owned it, you may be eligible for a partial exemption. Partial main residence is calculated as follows:

Your ownership period begins on the date of settlement.