Income tax: capital gains: if you build a dwelling on land that you acquired before 20 September 1985 ('pre-CGT'), are you required to make a choice under section 118-150 of the Income Tax Assessment Act 1997 (ITAA 1997) to get the main residence exemption?

Unless you make a choice under subsection 118-150(2), the main residence exemption in Subdivision 118-B will not be available for a dwelling that is a separate CGT asset for any part of the dwelling's ownership period before it becomes your main residence. [2]

Erica owns pre-CGT land on which she started to build a dwelling on 1 January 2011. The dwelling was completed on 1 January 2016 and Erica moves in immediately. She lives in the dwelling until the settlement of the sale of the property on 1 April 2016.

As the dwelling was Erica's main residence from 1 January 2016 to 1 April 2016, she will qualify for the main residence exemption for that period. She can also choose under subsection 118-150(2) to extend the main residence exemption for the four year period prior to 1 January 2016 as she has met the conditions; the dwelling became her main residence on completion and she resided in it for at least three months.

As the property was Erica's main residence for this three month period, and she makes a choice to apply section 118-150, she will qualify for the main residence exemption for the period from 1 January 2012 to 1 April 2016 (four years and three months). No other dwelling can be treated as Erica's main residence during this period.

This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

Subsection 108-55(2) provides that a building that you construct on pre-CGT land is a separate CGT asset from the land if you entered into a contract for the construction of the building on or after 20 September 1985; or if there is no contract - the construction started on or after that day.

If the building becomes your main residence, you can apply the main residence exemption in Subdivision 118-B to any gain attributable to the building. However, you may not qualify for a full exemption if the building was your main residence for only part of the period when you had an ownership interest in it.

Broadly speaking, you will have an ownership interest in a dwelling if you have a legal or equitable interest in the land on which it is erected.

Section 118-150 applies if you build a dwelling on land that you own. It enables you to choose to treat the dwelling as your main residence during some or all of the period when the dwelling was being constructed (when you could not live there).

You can make the choice under subsection 118-150(2) only if the dwelling becomes your main residence as soon as practicable after it is completed and it continues to be your main residence for at least three months. [3]

There is a time limit during which the choice can operate. This is the shorter of four years before the dwelling becomes your main residence; and the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence. [4]

Once you make the choice, no other dwelling can be treated as your main residence. [5]