Ordinarily, the CGT Main Residence Exemption (‘MRE’) applies once a dwelling has been lived in as a main residence.

However, the ‘construction rule’ in S. 118-150 of the ITAA 1997 allows for vacant land (or land during the period in which a dwelling is being constructed) to have main residence status for a maximum four-year period, where a dwelling is ultimately built on the land, and lived in as a main residence for at least three months.

Although the MRE is usually of no relevance to a dwelling on land that was acquired before 20 September 1985 (a pre-CGT residence), where an individual instead owns pre-CGT land on which a dwelling was built post-CGT, the land and the dwelling are separate assets for CGT purposes.

If such a dwelling is sold, consideration needs to be given as to the operation of the MRE for the post-CGT dwelling.

TD 2017/13 considers the application of S.118-150 in this scenario, and confirms that, if an individual builds a dwelling post-CGT on pre-CGT land, the individual is required to make a choice under S.118-150 to get the MRE.

Unless a choice is made under S.118-150(2). The MRE 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 a taxpayer’s main residence.

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