Edited version of private advice

Authorisation Number: 1052163436204

Date of advice: 3 October 2023

Ruling

Subject: CGT - main residence exemption

Question

Is any capital gain or loss you make due to the disposal of the lot disregarded?

Answer

No.

Question

Are you entitled to a partial main residence exemption due to the disposal of the lot?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property (the property) in XX 20XX.

You moved into the property shortly after purchase and treated it as your main residence until you moved interstate in XX 20XX.

The property was rented out from XX 20XX until July 20XX. The property was then demolished X weeks after the occupants moved out.

After demolition you decided to subdivide the land into 2 lots and build an investment duplex on the land.

Both lots are less than 2 hectares.

Construction commenced XX 20XX and was completed XX 20XX.

You received the occupation certificate in XX 20XX.

In the plan of subdivision, the two lots are known as:

•         Lot 1

•         Lot 2.

From XX 20XX both lots were rented by tenants who are currently occupying the duplex.

You have never occupied either newly constructed dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section118-145

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Issue

CGT Main Residence Exemption

Question

Is any capital gain or loss you make due to the disposal of the lot disregarded?

Summary

If a newly constructed dwelling is built to replace a previous dwelling that was demolished or destroyed, you can get a full exemption when you dispose 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 2 hectares or less

•         the new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it, and that period is at least 3 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 becomes your main residence, and this period is within 4 years

•         you dispose of the land and new dwelling together.

As the above criteria has not been met for either dwelling you do not qualify for a full/partial main residence exemption and the 6-year rule does not apply.

Detailed reasoning

Your main residence is exempt from CGT if you are an Australian resident and the dwelling:

•         has been the home of you, your partner, and other dependants for the whole period you have owned it

•         has not been used to produce income - that is, you have not run a business from it, rented it out or 'flipped' it (bought it to renovate and sell at a profit)

•         is on land of 2 hectares or less.

If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.

If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) while you use it for that purpose is 6 years.

In July 2021 you made the decision to demolish the original property. At this time a C1 CGT event is taken to have occurred which is when there has been a loss or destruction of a CGT asset. Due to this, the previous eligibility conditions are no longer applicable. ATO Interpretative Decision (ID) 2003/232 specifies that in this situation a taxpayer can qualify for a full main residence exemption under Subdivision 118-B of the ITAA 1997 provided that:

•         the taxpayer makes a valid choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling was constructed as their main residence from the time that the demolished or destroyed dwelling was last occupied by the taxpayer; and

•         the other requirements for a full main residence exemption in Subdivision 118-B of the ITAA 1997 are met.

ATO ID 2003/232 continues:

'Generally, if a taxpayer builds a dwelling on land they already own, the land does not start to qualify for exemption under the main residence exemption provisions until the dwelling actually becomes the taxpayer's main residence.

However, section 118-150 of the ITAA 1997 allows a taxpayer to choose for the main residence exemption to apply to land for up to four years before the dwelling becomes their main residence. The taxpayer can only make this choice if the dwelling becomes the taxpayer's main residence as soon as practicable after the building work is finished and it continues to be their main residence for a minimum of three months (subsection 118-150(3) of the ITAA 1997).

Ordinarily where a dwelling is demolished or destroyed and a new dwelling is constructed, the main residence usage of the first dwelling would not count towards an exemption for the new dwelling and land.'

Calculating CGT

CGT is the tax you pay on profits from disposing of assets such as property. Although it is referred to as 'capital gains tax', it's part of your income tax. It's not a separate tax.

To determine if you have a capital gain or loss you need to work out what you received for the asset when it is sold (this is your capital proceeds). Then work out your costs for the asset, which is what it cost you to acquire the asset, plus certain other costs you had for you to acquire, hold, and dispose of the asset etc. (this is your cost base).

Finally subtract the costs (cost base) from what you received (capital proceeds). If the result is:

•         more than zero, you have a capital gain for this asset

•         less than zero, you have a capital loss for this asset.

Subdivision of land

If you subdivide a block of land, each block that results are registered with a separate title. For CGT purposes, the original land parcel is divided into 2 or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land, and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.