Most of Australia has been experiencing a building boom fuelled by government policy such as the HomeBuilder scheme and a general desire to improve our living spaces as we spend more time working, educating, and living at home. However, with global supply chains and transport routes disrupted due to the effects of COVID-19, there has been well-publicised material shortages and builder collapses in the sector.
If your project to either build, renovate or repair your primary residence has run into a hiccup and now requires more time to complete, beware that it could end up costing you more than just money now, but also in the future. This change is due to the operation of the CGT building concession.
Firstly, for most individual Australian tax residents (not companies or trustees), there is an automatic exemption for the capital gain (or loss) that arises when you sell your main residence. This exemption is called the main residence exemption. Generally, for the exemption to apply, it must have been your residence for the entire ownership period. However, exemptions may apply in instances where you’re building, renovating or repairing your residence and have had to move out.
The “building concession”, as it is known, allows an individual to treat a dwelling as their main residence from the time that the land was acquired for a maximum period of up to 4 years, subject to certain conditions. For example, the dwelling must become the individual’s main residence as soon as practicable after the construction, repair or renovation is completed and must remain so for at least three months. The individual must also choose to apply the building concession.
The 4-year maximum period applies either when the individual acquires the ownership interest in the land or ceases to occupy a dwelling. If it takes more than four years to construct or repair the residence, you may only be entitled to a partial main residence exemption. This means that if you sell the residence at a future date, the period that you did not live in residence during construction or renovation will be subject to CGT.
A simple example would be if you purchased a piece of land for $100,000, intending to build a dwelling on it and live in it as your main residence. Due to various setbacks, the dwelling isn’t completed within the four-year maximum period but is eventually completed after five years. You move into the dwelling and live in it for another two years before selling it for $300,000. In this circumstance, the taxable capital gain would roughly be $143,000 (i.e. capital gain adjusted by the ratio of non-main residence days to days in the ownership period).
As you can see, the financial consequences of getting it wrong are genuine. Suppose you cannot complete your main residence’s construction or renovation project within the 4-year maximum timeframe due to either the builder becoming bankrupt or due to the severe illness of a family member. In that case, you may be able to apply to the ATO for discretion to extend the four years, so you don’t get penalised financially.
If you need help to apply to the Commissioner to extend the 4-year building concession, we can help you work out whether you qualify and guide you through the application process. We can also help with various other CGT issues you may have. Call our office or email for expert help today enquiries@rm.net.au.
**The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
