Edited version of private advice

Authorisation Number: 1052043049487

Date of advice: 10 October 2022

Ruling

Subject: CGT - main residence

Question 1

Are you entitled to a full exemption on your original 50% ownership interest in the property?

Answer

Yes.

Question 2

Are you entitled to a partial exemption on your 50% ownership interest in the property which you inherited from your spouse?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You and your spouse purchased land pre-CGT.

The land size was slightly over 2 hectares.

A license to build on the land was issued post-CGT on DD MM YYYY. Shortly afterwards, you and your spouse commenced building your main residence.

Once the house was built to the lock up stage in MM YYYY, you and your spouse moved into the property and used it as your main residence.

This property has been your main residence since moving in.

The reason why it took some time to build the house was due to you both living and working away in order to financially be able to build the dwelling. The house was a kit home and you and your spouse did as much of the build as you could to save money.

Your spouse passed away on MM YYYY.

You inherited your spouse's 50% ownership interest in the property.

You are considering selling the property.

You intend on remaining in the property until such time that you decide to sell it.

You and your spouse never owned any other properties.

Assumptions

You continue to reside at the property until it is sold. Alternatively, if you move out before settlement, either the six- month changing main residence rule under section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply or you will use the absence rule under section 118-145 of the ITAA 1997 to continue to treat the property as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-55

Income Tax Assessment Act 1997 section 109-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Section 102-20 of the ITAA 1997 Income Tax Assessment Act 1997 (ITAA) provides that you make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else (section 104-10 of the ITAA 1997).

You will make a capital gain if the capital proceeds from the disposal of a CGT asset are more than the cost base.

A capital gain or loss you make is disregarded if you acquired the asset before 20 September 1985.

Also, you can generally disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT, the dwelling must be your home for the whole period that you owned it (subsection 118-110(1)(b) of the ITAA 1997) and you must not have used the dwelling to produce assessable income (subsection 118-190 of the ITAA 1997). The main residence exemption also includes up to a maximum of 2 hectares of land used primarily for private and domestic purposes in association with the dwelling (section 118-120 of the ITAA 1997).

Your original 50% ownership interest in the property

Subdivision 108-D of the ITAA 1997 covers when assets are separate CGT assets. Under subsection 108-55(2) of the ITAA 1997 a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if you entered into a contract for the construction on or after that day.

As you acquired the land before 20 September 1985 (pre-CGT) and the house did not start to be built until post-CGT, for the purposes of capital gains tax the building is a separate CGT asset from the land. Therefore, the land being a pre-CGT asset is exempt from capital gains tax; however, the building is not a pre-CGT asset.

Please note that as section 108-55 of the ITAA 1997 applies and is more specific to your circumstances, it is not necessary to consider section 108-70 of the ITAA 1997 regarding capital improvements.

Under section 109-10 of the ITAA 1997 the post-CGT building is considered to have been acquired on the date construction started which in your case is MM YYYY.

Section 118-150 of the ITAA 1997 extends the CGT main residence exemption to allow a taxpayer to treat land as their main residence for up to four years if they build, repair or renovate a dwelling on the land that subsequently becomes their main residence. The Commissioner has discretion to extend this period where the taxpayer does not build, repair or renovate a dwelling and establish it as their main residence within four years.

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.

•                     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.

These examples are not exhaustive.

You took longer than the four-year period to build the dwelling due to you and your spouse needing to build the kit home as much as possible yourselves because of financial constraints. Also for financial reasons, you both needed to work and live away from the area to be able to build the house. You were approximately X months outside the allowed four-year period. Having regard to your circumstances the Commissioner will exercise the discretion in your case to extend the four-year period to include the X months over the four years.

Consequently, you are entitled to a full main residence exemption in relation to the building component of your original 50% ownership interest. And as the land component of your original 50% ownership interest is exempt as a pre-CGT asset, your original 50% ownership interest in the property is fully exempt from CGT.

Your inherited post-CGT 50% ownership interest in the property

You are taken to of acquired the 50% ownership interest in the property you inherited from your spouse on the day they passed away for its market value at that time.

As you have been residing at the property as your main residence from when the house was completed in MM YYYY, you would be entitled to a full main residence exemption in relation to the 50% ownership interest you inherited on MM YYYY except that the land on which the dwelling is situated, exceeds 2 hectares.

The portion of your post-CGT ownership interest that relates to the land in excess of 2 hectares is subject to CGT. Half of the property land in excess of 2 hectares is pre-CGT so only the other half will be subject to CGT. The first element of the cost base of this portion of land is its market value as at the date of death of your spouse. You are entitled to apply the 50% discount when calculating the capital gain as you have held your inherited 50% ownership interest for more than 12 months.