Here is the full story of the CGT treatment of knock-down rebuilds.
The existing law
Were it not for the policy position the ATO takes on its website at QC 64895 (based on withdrawn ATO IDs 2003/232 and 2003/466), the existing CGT legislation would give rise to a partial CGT exemption in all knock-down rebuild cases.
This is because in determining if the new home has qualified as a taxpayer’s CGT-exempt main residence throughout the “ownership period” (per s 118-185 of the ITAA 1997), this ownership period begins when the person first acquires an interest in the land on which the main residence is built (see s 118-125).
And no matter how long they have lived in the newly built home as their main residence, in the case of a knock-down rebuild, there will always be a period before that time when that dwelling does not qualify as their main residence.
This will also be the case even if the taxpayer chooses to apply the “building concession” in s 118-150. This is because in the case of a “knock-down rebuild”, the four-year period in which the taxpayer can treat the land on which they are building their new home as their main residence only begins when they first cease to occupy the existing dwelling on the land (see s 118-150(5)).
ATO policy
However, the Commissioner’s “policy position” (on the ATO website at QC 64895) states:
“If a newly constructed dwelling is built to replace a previous dwelling that was demolished or destroyed, you can get a full exemption when you dispose of the property if:
- The original dwelling was your main residence for the full period you owned it, you did not use it to produce assessable income, and it was on land covering an area of two hectares or less;
- The new dwelling becomes your main residence as soon as practicable after it is completed, it continues to be your main residence until you dispose of it, and that period is at least three months;
- You make a choice to treat the vacant land and new dwelling as your main residence in the period starting when you stopped occupying the previous dwelling and ending when the new dwelling becomes your main residence, and this period is four years or less;
- You dispose of the land and new dwelling together.
…
The effect of making the choice is that there will be an unbroken period of a main residence occupancy on the land from the time the original dwelling became your main residence until your new dwelling built on that land is sold.”
In other words, to use the language of withdrawn ATO ID 2003/232, where the original dwelling was the taxpayer’s main residence, then “the two dwellings may be treated as one and the main residence usage of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”.
(Presumably, this will also be the case where the original dwelling is your main residence for the full period by way of using the absence concession.)
A partial CGT exemption still possible
Importantly, the content on the ATO website at QC 64895 also provides that a partial CGT exemption can arise in this case of a knock-down rebuild in several situations as follows:
- Where the original dwelling would not have qualified for a full CGT main residence exemption (e.g. where it was rented first or where the absence concession could not, or was not, chosen to cover a period of absence);
- Where it takes more than four years to build the new dwelling from the time of ceasing to occupy the original dwelling (or the Commissioner does not grant an extension of time to the four-year period); and
- Where the building concession was not chosen because the conditions for it were not met (e.g. the new dwelling was not immediately occupied at the taxpayer main’s residence or the taxpayer chose another dwelling to qualify as their main residence during the four-year building period).
Note: The ATO drew the same conclusion in (withdrawn) ATO ID 2003/466.
Conclusion – legislative change needed?
Despite the favourable and sensible approach taken by the ATO to the CGT consequences of knockdown rebuilds, it should be noted that this is only a policy position. There is no provision in the existing CGT legislation to treat the “usage of the two dwellings” as one residence for this purpose.
So, perhaps a legislative change would be useful.
