Edited version of private advice

Authorisation Number: 1052096925394

Date of advice: 13 March 2023

Ruling

Subject: CGT - main residence exemption

Question

Does the Commissioner have discretion to extend the 6-month period under paragraph 118-140(1)(a) of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods:

The income year ended 30 June 20XX

The income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You entered into a contract for the purchase of vacant land as joint tenants on DD/MM/YYYY, which settled on DD/MM/YYYY.

You intended to build a new principal place of residence on the vacant land.

Soon after purchasing the vacant land, you started actively trying to sell your existing main residence.

You owned your existing main residence as joint tenants.

You intended to sell your existing main residence within the 6 months following the purchase of the vacant land.

You entered into a contract to dispose of your existing main residence, with settlement falling just outside the 6-month overlap in property ownership.

In preparation for settlement, you vacated your existing main residence and began to build on the vacant land.

On the settlement date the purchaser breached the contract.

You commenced legal proceedings for breach of contract but were advised by your legal team that it wouldn't be cost effective.

You subsequently relisted your existing main residence for sale.

You entered into a second contract for sale of your existing main residence on DDD/MM/YYYY, which settled on DD/MM/YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 118-140(1)(a)

Reasons for decision

The main residence exemption

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the conditions of the main residence exemption. It provides that a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to your ownership interest in a dwelling is disregarded if:

(a)  you are an individual; and

(b)  the dwelling was your main residence throughout your ownership period; and

(c)   the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Section 118-150 of the ITAA 1997 extends the 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.

Usually, a property stops being your main residence when you stop living in it. However, under section 118-145 of the ITAA 1997 (the absence rule), you can continue treating a property as your main residence:

(a)  for up to 6 years if the property is being used to produce income, or

(b)  indefinitely, if the property is not being used to produce income.

Generally, you are only entitled to apply the main residence exemption to one dwelling at a time, however, there is an exception to this rule under section 118-140 of the ITAA 1997 that applies when you are changing main residences.

Section 118-140 of the ITAA 1997 provides that if you acquire a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

(a)  6 months ending when your ownership interest in your existing main residence ends; or

(b)  the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends.

Importantly, there is nothing within the legislation that allows the Commissioner to extend the 6-month period under paragraph 118-140(1)(a) of the ITAA 1997.

Application to your circumstances

Although we are empathetic with your circumstances, the Commissioner does not have discretion to extend the 6-month period under paragraph 118-140(1)(a) of the ITAA 1997, to allow you to treat both properties as your main residence for a period longer than 6 months.

Draft Taxation Determination TD 1999/43 Income tax: capital gains: does section 118-140 of the Income Tax Assessment Act 1997 (about changing main residences) allow you to treat two dwellings as your main residence for a period of up to six months if you choose to apply: (a) section 118-145 (about absences from your main residence); or (b) section 118-150 (about building, repairing or renovating a dwelling)? (TD 1999/43) discusses the application of the 6-month rule under section 118-140 of the ITAA 1997.

TD 1999/43 confirms that section 118-140 of the ITAA 1997 acts in conjunction with section 118-145 of the ITAA 1997, about the absence rule, and 118-150 of the ITAA 1997, about building, repairing or renovating a dwelling.

In your circumstances, you can choose to treat both the vacant land and your existing main residence as your main residence for 6 months, under paragraph 118-140(1)(a) of the ITAA 1997. This 6-month period ends when you sold your existing main residence, meaning you can treat both properties as your main residence between DD/MM/YYYY and DD/MM/YYYY.

For the period between when you acquired the vacant land on DD/MM/YYYY and DD/MM/YYYY, you can choose to treat either the vacant land or existing main residence as your main residence.