There is a concession in the CGT rules that can allow you to treat a property as your “main residence” even though it does not yet have a habitable dwelling. Under the concession you may be able to receive the CGT exemption while you are still building.
It is a widely recognised fact that a capital gains tax (CGT) exemption applies to your principal or main residential property. And one of the requirements for this main residence CGT exemption is that there needs to be a building on that property.
What is less well known is that the period when this main residence CGT exemption applies can be extended to cover the time it takes to finish construction of (or complete repairs made to) the residence on the property. This is commonly referred to as the “building concession” or sometimes the “four year rule” for reasons that are outlined below.
What is the building concession?
The “building concession” allows you to choose to treat a property you have acquired as your main residence during the period that you “construct, repair, renovate or finish building” a dwelling on that property. The land at the time of acquisition may or may not contain an existing dwelling on it, or if there is a dwelling, you have vacated it for repairs.
Note that vacant land may also be treated as your “main residence” if the land is vacant because your home has been destroyed (see more on this below).
What are the conditions?
The relevant dwelling must become your main residence “as soon as practicable” after building or renovations are complete, and remain so for at least three months. Further, the concession applies for a maximum period of four years from the time you acquire the land, or cease to occupy a dwelling already on the land, until the constructed or repaired dwelling is occupied as your main residence. This is the reason the concession is sometimes also referred to as the “four year rule”.
In limited circumstances, the Tax Office can exercise some discretion to extend these four years — examples include where the builder becomes bankrupt and is unable to complete the construction or where a family member has a severe illness. Ask us if you need an extension.
What if the four year period elapses?
If more than four years pass before the constructed or repaired dwelling is occupied as a main residence, a partial main residence CGT exemption can apply for that excess period.
What if a dwelling is destroyed or is compulsorily acquired?
You can choose to apply the main residence exemption to a property even if you no longer reside in the property. This rule is commonly referred as the “absence concession” or sometimes the “six year rule”. The requirements for this rule to apply can be tricky, so see us for information.
If a dwelling that is subject to the absence concession is accidentally destroyed (or compulsorily acquired) and land is bought on which to build the replacement (“substitute”) dwelling, the building concession can also be used in these circumstances to preserve the effect of the absence concession in relation to the substitute dwelling.
However, the land must be acquired within one year after the income year in which the original dwelling was accidentally destroyed or was compulsorily acquired (although there is some discretion allowed by the Tax Office).
Can the concession apply for the period after the dwelling is destroyed?
Yes. The concession is also available if a main residence is accidentally destroyed (such as with a bushfire or flood) and the vacant land is subsequently sold or disposed.
Importantly, the destruction must be by way of “accident”.
The concession will apply to treat the vacant land as your main residence for an unlimited period of time from when the dwelling was destroyed until the disposal of the land, provided the dwelling was your main residence at the time of its destruction, or taken to be by way of choosing to apply the absence concession, and no other dwelling was subsequently built on the land.
Further, if a choice is made to apply the concession, no other dwelling can be treated as your main residence during the period it covers.
For further questions on how to apply the CGT main residence exemption, under any of the various circumstances, please contact us.