Issue Number 29
December 2016

Capital Gains Tax and the Main Residence Exemption

Thinking of moving house?                                                   

People move house for various reasons – moving to a larger or better house, relocating for study or work, relationship changes, or even a lifestyle change. Whatever the reason, a person is likely to move house several times during their lifetime. Organising the practicalities of moving house can be stressful at the best of times but if you own the house you are moving out of, the tax implications of your move is something else you should add to your ‘Moving Checklist’. Specifically, capital gains tax (CGT). Although the sale of a property that has always been used as your main residence would ordinarily be fully exempt from CGT, this may not always be the case. Following are two examples of how access to the full main residence exemption can be preserved with careful planning.

Moving from one main residence to another

Ordinarily, you can only ever have one property nominated as your main residence at any given point in time unless you are selling your old main residence and buying another. Under section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997), if you acquire a new home before you dispose of your old one, both dwellings can be treated as your main residence for CGT purposes for up to six months if:

  • The old dwelling was your main residence for a continuous period of at least three months in the 12 months before you disposed of it,
  • You did not use it to produce assessable income in any part of that 12 months when it was not your main residence, and
  • The new dwelling becomes your main residence.

Therefore, you should aim to keep within this six month transfer period when changing your main residence in order to minimise any CGT implications.

Dwelling is demolished and new dwelling is constructed

If you do not want to change location but your current house is beyond a renovator’s skills, you may decide to demolish your existing dwelling and build a new home. 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 – meaning the property would only be entitled to a partial rather than a full exemption from CGT if/when it is sold in the future.

However, if you:

  • Build a dwelling to replace a demolished or destroyed main residence
  • Make a choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling is constructed as your main residence from the time that the demolished or destroyed dwelling was last occupied by you, 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 your main residence

then the two dwellings on the property (i.e. the demolished and the newly constructed dwellings) may be treated as one and the main residence usage of the former will count towards the main residence exemption for the new dwelling and land.

Where this choice is made, the newly constructed dwelling needs to be used as your main residence as soon as practicable and for a period of at least 3 months following the construction of the dwelling in order for the exemption to apply. If these conditions are satisfied, then if/when you sell the property in the future, it may still be eligible for the full main residence exemption from CGT.

Take home message

The most valuable asset a person owns is often their home and given increasing real property prices, qualifying for the CGT main residence exemption can be a critical tax saver. There can be various criteria to satisfy in order to qualify for the CGT main residence exemption, depending on particular surrounding circumstances. If you are considering making a change, please contact our office.

Vicki Cremona
Business Services / Tax Manager

Important: This is not advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly.

We therefore recommend that our formal advice be sought before acting in any of the areas. This document is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

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