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Edited version of private advice
Authorisation Number: 1051996469790
Date of advice: 27 June 2022
Ruling
Subject: CGT - main residence
Question
Will the Commissioner exercise the discretion in paragraph 118-150(4)(a) of the Income Tax Assessment Act 1997 to allow you a longer time of up to 6 years to choose to apply the main residence exemption before the dwelling you're building actually becomes your main residence?
Answer
Yes. Based on the facts provided, on balance the Commissioner will allow you a longer time of up to 6 years to choose to apply the main residence before the dwelling you're building actually becomes your main residence. However, this is subject to the time limit during which the choice can operate under subsection 118-150(4) which is the shorter of:
a) 4 years, or a longer time allowed by the Commissioner, before the dwelling becomes your main residence; and
b) the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.
This ruling applies for the following periods:
Period ended 30 June 20XX
Period ended 30 June 20XX
Period ended 30 June 20XX
Period ending 30 June 20XX
Period ending 30 June 20XX
Period ending 30 June 20XX
The scheme commences on:
30 January 20XX
Relevant facts and circumstances
On XX November 20XX, you and your spouse signed a contract to acquire a block of vacant land as tenants in common for around $X million.
The purchase of the land settled on XX January 20XX. You intend to build a dwelling on the land that will be occupied as your main residence as soon as practicable following completion.
The land was marketed as, and acquired with, a prior Development Application (DA). You inherited both the DA plans and the relationship with Architects Z who had obtained that DA through ABC Council.
Following purchase, you immediately contacted and began actively working with Architects Z and began to work to revalidate and refine the plans on which the DA was based.
It had been your original intention to build to that legacy DA with little-to-minor adjustment. Those plans would subsequently be found by different architects to be both architecturally and financially infeasible, however that was unfortunately not known at the time.
Upon working with Architects Z, it became apparent that the legacy DA featured a range of peculiarities that rendered it ill-suited to conventional needs. You continued working with Architects Z between January 20XX to August 20XX to re-conceptualise the design. This involved multiple and costly engagements to prepare and revise concept plans and re-iterate fundamental requirements.
Between September 20XX and January 20XX, you started to become nervous that the level of specification offered by Architects Z's drawings were not sufficiently detailed to enable precise construction costs estimation. Unlike some other architects, Architects Z did not accompany its various iterations of possible Development Application design options with quantity survey cost predictions. Informal pre-tender market soundings of various builders began to produce highly variable preliminary indications of total construction costs, requiring you to undertake best and worse-case financial remodelling in parallel with their work with your architects. Further, the difficult nature of physical site access frustrated visual inspection and resulted in premiums being priced into indicative estimations on account of uncertain variables and assumptions.
In mid-October 20XX, your spouse resigned from professional work for the predominant purpose of administering the build and to prepare your family home at suburb M for a sale campaign. The sale was delayed too for reasons beyond your control. Your home at suburb M was finally sold on X November 20XX.
It was never in your contemplation that the build would experience the journey that it has. Your expectations were that crystallising the value of your current home would enable you to perform a stocktake of your actual financial capacity and engage in more accurate modelling with respect to the budget available for construction expenses. You were still operating under a significant degree of uncertainty as to the likely total construction costs for the build.
At this time, you also came to acknowledge your initial, genuine, underestimation of the size, scale, and complexity of the project, including:
a) the structural requirements of the site
b) the level of excavation that would be required
c) the engineering requirements for a dwelling on a site of that nature; and
d) the level of specialist investigation (topography, excavation estimation, stormwater, sewage, and other utility requirements) required in relation to virgin, untended land.
In February 20XX, you continued to feel concerns around the affordability of constructing your family home to the Architects Z plans. Notwithstanding this, you also considered that you had by now travelled very far down a path with, and invested significantly in, the vision for the site you had developed with Architects Z.
Between February and June 20XX, you continued to rework, prepare, and finalise Development Application documents with Architects Z for submission to ABC Council. This proved to be a very challenging and difficult period because during this time, businesses transitioned to working from home due to COVID. Your consultations with Architects Z continued but migrated to virtual meetings, which were considerably more inefficient and time-consuming. They also did not have easy access to their full suite of office software tools. This resulted in further delays in their turnaround times for work product and in obtaining reports from consultants including planning, BASIX, landscape consultants and structural engineering.
During this same period, Architects Z and a range of other required specialist consultants were not able to physically inspect the site due to COVID restrictions. This further delayed the preparation of supporting reports required to accompany the Development Application.
The process with ABC Council proved very trying. Due to COVID, Council also operated remotely with a skeleton staff.
You made numerous attempts to lodge and re-lodge the development application between May 20XX and June 20XX due to changed Council requirements. Your section 4.55 Development Application, based on the Architect Z plans, was finally submitted in June 20XX.
The ABC Council approved your Development Application in September 20XX.
Faced with the unaffordability of the total construction costs disclosed in the tender responses, you were financially unable to proceed to an appropriate builder selection or commence construction works. Instead, you re-engaged actively with Architects Z from September 20XX to December 20XX to revise the approved Development Application plans for the build with the specific aim of reducing construction costs. This resulted in a range of further amended designs, including the removal of an entire floor and other reductions in scale. Having by this time contracted to complete the sale of your current family home, this was an extremely frenetic period as you were also busy packing, moving items to storage and searching for a suitable rental home for the family to relocate to. During this period, you also observed many construction projects experiencing supply shortages and cost blowouts due to COVID.
In early 20XX, you approached XY Architects for an independent opinion on the Architects Z Development Application plans. XY Architects confirmed the builder tender response feedback that the design was inefficient from a building, construction and cost perspective, overscoped, necessitated impractical levels of excavation and incorporated a range of features which increased costs without discernible benefits.
In March 20XX you discontinued Architects Z's services and entered into a new architectural services engagement with XY Architects to prepare a new, rescaled design for the land that was less excessive, more feasible from a building perspective, engaged more sympathetically the land, reduced its bulk and scale and was more affordable.
ABC Council advised that the extent of the changes proposed were so significant that a fresh Development Application would need to be prepared and submitted.
In accordance with ABC Council's guidance, between March 20XX to October 20XX, you worked intensively with XY Architects, to design and settle concept drawings, finalise plans, prepare a new Development Application, commission, and obtain specialist and consultant reports and submit the finalised application to the Council.
The new Development Application was subject to assessment by the Council for a considerable time, due to COVID-related staff shortages and a long backlog of applications. The Council granted the new Development Application in March 20XX.
The tender package is anticipated to be ready for release to prospective builders by mid-June 20XX seeking responses and fee proposals from builders by mid-end July 20XX. That tender request will also invite builders to provide estimates of timeframe for construction.
Previous indications from builders with respect to construction timeframe (from commencement of works to lock-up stage) ranged between 18-36 months, due to:
a) The size and quality of the dwelling to be constructed; and
b) the impact of COVID-19 in other countries where some building materials will be sourced from.
During this entire period, you have worked diligently and conscientiously towards the finalisation of detailed construction plans to achieve the construction of your family home within a financially feasible cost-envelope.
Progress, while consistent, has been challenging and often slow, due to the range of unexpected external factors you were required to navigate. These included the complex nature of the site (and associated architectural and construction considerations), high variability in build/construction cost estimation, site topography, the re-assessment of considerable excavation requirements and the difficulty associated with responsibly obtaining accurate site-contour surveys without creating land stabilisation risks.
Assumption
The dwelling actually becomes your main residence as soon as practicable after the construction is finished; and it continues to be your main residence for at least 3 months.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-150
Reasons for decision
Legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.
Section 118-150 extends the CGT main residence exemption to allow you to treat land as your main residence if you build, repair, or renovate a dwelling on the land that subsequently becomes your main residence.
Relevantly, subsection 118-150(1) applies to land that you own if you build a dwelling on the land.
You can choose to apply the main residence exemption as if the dwelling that you are building were your main residence from the time you own the land - subsection 118-150(2).
Subsection 118-150(3) provides you can make the choice only if, relevantly:
(a) a dwelling on the land that you construct becomes your main residence as soon as practicable after the work is finished; and
(b) it continues to be your main residence for at least 3 months.
Subsection 118-150(4) provides for a time limit during which the choice can operate. This is the shorter of:
a) 4 years, or a longer time allowed by the Commissioner, before the dwelling becomes your main residence; and
b) the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.
The Commissioner may exercise the discretion in situations such as the following:
• When you are unable to build, repair or renovate the dwelling within this time period due to circumstances outside your control. For example, the relevant builder becomes bankrupt and is unable to complete the building, repairs or renovations.
• When you are unable to build, repair or renovate the dwelling due to unforeseen circumstances arising during this period. For example, you or a family member has a severe illness or injury.
• When building, repairing, or renovating the dwelling within the four years would impose a severe financial burden on you. For example, you would be required to incur an excessively high level of debt relative to your income. Consequently, you may spend time accumulating sufficient savings (relative to your income) to build, repair or renovate a reasonable dwelling relative to your circumstances.
These examples are not exhaustive.
Application to your circumstances
In your case, you're unable to build the dwelling within the 4-year period due to circumstances outside your control and other unforeseen circumstances arising during this period which cause severe financial burden to you.
Whilst it was your initial intention to build to the legacy Development Application, those plans were subsequently found to be inefficient from a building, construction and cost perspective, overscoped, necessitated impractical levels of excavation and incorporated a range of features which increased costs without discernible benefits.
The majority of fee proposals based on the legacy Development Application were manifestly unaffordable, with indicative total construction costs that were almost double the quantum suggested by your pre-purchase due diligence investigations. Even the lower end of these proposals materially exceeded your budgeted predictions and as a result you were financially unable to proceed to an appropriate builder selection to start construction works.
This necessitated you to engage a new architect to prepare a new, rescaled design that was more affordable. This resulted to a new Development Application to be lodged, which caused further delays.
COVID restrictions also meant further delays in the progress of your development application due to consultants unable to inspect the site, your architects working from home and they have no access to the relevant software tools to do the job; and Council staff operated on skeletal staffing.
Revising the DA plans due to costs blow out and the further delays in the process affected you financially.
Therefore, based on the facts provided, on balance the Commissioner will exercise the discretion to allow you a longer time of up to 6 years to choose to apply the main residence before the dwelling you're building actually becomes your main residence.
However, this is subject to the time limit during which the choice can operate under subsection 118-150(4) which is the shorter of:
a) 4 years, or a longer time allowed by the Commissioner, before the dwelling becomes your main residence; and
b) the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.