ATO Interpretative Decision

ATO ID 2006/185 (Withdrawn)

Income tax

• This ATO ID is withdrawn. Guidance on the basis of the decision in this ATO ID can be found in the Guide to capital gains tax (NAT 4151). Additional guidance can be found in Residential rental properties (QC 17187).
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Issue

Is the taxpayer entitled to a full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of a dwelling built to replace a dwelling that was always the taxpayer's main residence, if the original dwelling was occupied by the taxpayer for only part of the time they owned it?

Decision

Yes. The taxpayer is entitled to a full main residence exemption under Subdivision 118-B of the ITAA 1997 as the taxpayer has made valid choices under sections 118-145 and 118-150 of the ITAA 1997, where the other requirements for a full main residence exemption in Subdivision 118-B of the ITAA 1997 are met.

Facts

The taxpayer purchased a dwelling in late 1996 and resided in that dwelling until mid 1998. From that time, the dwelling was rented out until early 2002. The taxpayer continued to treat the dwelling as their main residence during this period.

In mid 2002, the taxpayer demolished the dwelling and built a new dwelling that became the taxpayer's main residence in late 2002.

The taxpayer continued to live in the new dwelling until it was sold in late 2004.

Reasons for Decision

The main residence exemption provisions under Subdivision 118-B of the ITAA 1997 disregard any capital gain or capital loss that a taxpayer makes on the disposal of a dwelling that is their main residence. The exemption also extends to certain land that is adjacent to the dwelling.

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.

However, as stated in ATO Interpretative Decision ATO ID 2003/232, if the taxpayer:

•

builds a dwelling to replace a demolished or destroyed main residence; and

•

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

•

there is not more than four years between the time the demolished or destroyed dwelling was last occupied and the time the new dwelling became the taxpayer's main residence

the two dwellings may be treated as one and the main residence usage of the original dwelling will count towards the main residence exemption for the new dwelling and land, as if there has been an unbroken period of main residence occupancy.

Subsection 118-145(1) of the ITAA 1997 allows the taxpayer to make a choice that a dwelling continues to be treated as their main residence even though it has ceased to be so. The choice can be made for a total of six years where the dwelling was used for the purpose of gaining or producing assessable income, or indefinitely where it was not used for this purpose.

In this case, the taxpayer chose to treat the original dwelling as their main residence from the time they stopped living in the dwelling to the time the dwelling was demolished.

The effect of making the choices under sections 118-145 and 118-150 of the ITAA 1997 in these circumstances, will be that there is taken to be an unbroken period of main residence occupancy on the land from the time the original dwelling became the taxpayer's main residence in late 1996, until the new dwelling was sold in late 2004.

The facts of this case can be distinguished from those in ATO Interpretative Decision ATO ID 2003/466. The taxpayer in ATO ID 2003/466 did not choose to treat the original dwelling as their main residence for the entire ownership period and, as a result, the taxpayer was only entitled to a partial main residence exemption. In this case, the taxpayer chose to treat the original dwelling as their main residence for the entire ownership period.

Accordingly, the taxpayer is entitled to a full main residence exemption.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   Subdivision 118-B
   section 118-145
   section 118-150
   subsection 118-150(4)
   subsection 118-150(5)

Related ATO Interpretative Decisions
ATO ID 2003/232
ATO ID 2003/466
ATO ID 2003/810

Keywords
Capital gains tax
Absence choice
Dwelling ceases to be a main residence
CGT exemptions
CGT main residence exemption

Business Line:  Small Business/Individual Taxpayers

Date of publication:  4 August 2006

ISSN: 1445-2782