Janet from Leeming, WA asked
"I have been renting for two years whilst building my new home, however I am now in a situation where the home must now be sold upon completion. As I was building this with the intent of having it as my principal residence, and have not had a principal residence in the meantime, will Capital Gains Tax (CGT) apply upon the sale of this home?"
A taxpayer’s dwelling, owned by an individual and normally occupied as the taxpayer’s main dwelling, is usually free from CGT.
Now, you may well ask "what is a dwelling?"
Generally, a ‘dwelling’ is a unit of residential accommodation owned by the taxpayer (or leased for not less than 99 years) and includes a flat, home unit, caravan, houseboat, or other mobile home, and the land immediately under the unit of accommodation.
Consequently, if a unit of accommodation is removed from the land and the land is then sold, the land does not come within the definition of ‘dwelling’ and is not exempt under the main residence provisions. The land is only exempt if it and the unit of accommodation are sold together as a dwelling.
So what is a main residence ?
Whether a dwelling is a taxpayer’s main residence is a question of fact. Taxation Determination TD 51 indicates that the following factors are relevant in deciding if a dwelling is the taxpayer’s main residence –
- the length of time the taxpayer has lived in the dwelling;
- the place of residence of the taxpayer’s family;
- whether the taxpayer has moved his or her personal belongings into the dwelling;
- the address to which the taxpayer has his or her mail delivered;
- the taxpayer’s address on the Electoral Roll;
- the connection of services such as telephone, gas and electricity;
- the taxpayer’s intention in occupying the dwelling.
The mere intention to construct a dwelling or to occupy a dwelling as a main residence, but without actually doing so, is insufficient to obtain the exemption.
There is however an exception known as a "Pre-occupation Exemption"
A dwelling may qualify for the main residence exemption before the dwelling actually becomes the taxpayer’s main residence.
This can occur in the following circumstances, if the taxpayer so chooses –
- where a taxpayer acquired some vacant land after 19 September 1985 and later erects a dwelling on it;
- where there was an existing dwelling on the site which was –
- demolished, and a new dwelling erected, or
- renovated, repaired, or finished before being occupied as the taxpayer’s main residence.
- demolished, and a new dwelling erected, or
In these circumstances, the taxpayer can choose to treat the original dwelling as his or her main residence for a period of up to 4 years before occupancy of the dwelling so that the main residence exemption will apply.
In this period no other property can be treated as the taxpayer’s main residence.
If the taxpayer acquired vacant land, the 4 year period runs from the date the taxpayer acquired his or her ownership interest in the land to the date the taxpayer started to occupy the new dwelling.
If there was an existing dwelling on the land when the taxpayer acquired their ownership interest, and either the taxpayer or another person occupied that dwelling, the pre-occupation exemption period starts from when the dwelling ceased to be occupied to build, repair, renovate or finish building the dwelling.
To be eligible to make these choices, the dwelling must become the taxpayer’s main residence as soon as practicable after completion of the work and continue as the taxpayer’s main residence for at least 3 months.
The ‘pre-occupation period’
During the ‘pre-occupation period’, no other dwelling can be treated as the taxpayer’s main residence, except if the six months double exemption applies on the change of main residence.
For the pre-occupation period to be eligible to be added to that of
occupancy –
- the taxpayer must take up occupancy as soon as practicable after the work is finished; and then
- the dwelling must be the taxpayer’s main residence for at least three months.
If those conditions are satisfied, any capital gain from a CGT event happening in relation to the asset (even covering the period when it was vacant land, or the dwelling was being built) is exempt from CGT.
If the new dwelling is not occupied for 3 months after completion, the potential full exemption is lost because the pre-occupation period cannot be added to the post-completion occupation time during which it was the taxpayer’s main residence. (This is not the case if occupation was terminated by death in that 3 month period.)
[Extracted from Taxpayers Australia, 2007 & 2008 Tax Summary, Chapter 5 - Capital Gains Tax.]
About The Author
Warren Kruger is an Australian Tax Specialist and Advisor.
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Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.
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