Trap to Building a Main Residence on pre-CGT land

A recent ATO Ruling (TD 2017/13) provides guidance on tax issues that can arise when a taxpayer owns pre-CGT land and now seeks to construct a home. What may seem a main residence may not always be tax free.

The issue revolves around the construction rule (s118-150 ITAA97) which is the law which allows a taxpayer to effectively backdate land as a element of the main residence for up to 4 years when a home is constructed AND occupied for three months after completion.

CGT law requires that the pre-CGT land be a seperate CGT asset to that of the house. So if the house is subsequently sold its tax free - right ?

Well this determination looks more carefully at s118-150(2) and its impact can be broader than imagined. The issue that arises can be a CGT trap for the unwary.

In order to apply the CGT main residence exemption s118-150(2) requires NO OTHER dwelling can be the taxpayers main residence during the construction period. So no absence rule !! The place where the taxpayer lives during construction may be taxable although we normally associate this with a exempt main residence.

So the taxpayer must choose - Treat the pre-CGT land and property as their home OR their former actual home. No overlap is allowed by the need in s118-150 to make an election to choose one or the other. The election isnt a form...Its the way the taxpayer (and their spouse) prepare their tax returns.

So who may be affected ?
1. Anyone who constructs a home on pre-CGT land and
2. They reside in another property they own until the new property is constructed and
3. They later sell EITHER property. They need to consider how to treat both properties for tax purposes

 

@Paul@PFI - we're obviously talking about a 'small' cohort of investors with assets dating back to pre-1987 purchases not to those who've bought since the introduction of CGT.

The outcome will be different in each situation eg: pre-cgt asset used as in IP for the last 30 years now downsizing but carrying out major renovation works or a ppor for the last 30 years & Reno etc.

 

Yes. If its a pre-CGT property and demolition of the former property is involved it may also alter the issues. In most instances it will result in a seperate CGT asset as the land remains pre-CGT but any new build isnt.

Separate assets for CGT purposes indicates some other issues.

Granny flats can also impact

 

Looks like they are a few good arguments for not selling anything and just keep building up your portfolio.

 

Selling is not always the issue. In this case the election for which property may complicate it