Australia has experienced an extended period of construction activity, driven by government incentives such as the HomeBuilder scheme and an increased focus on improving home environments as people spend more time working and studying at home. At the same time, the building sector has faced significant challenges. COVID-19 disrupted global supply chains, created material shortages and contributed to a number of builder insolvencies. As a result, many homeowners have encountered delays in building, renovating or repairing their main residence.
Why delays matter for tax purposes
If your project has stalled, the cost may be more than financial or emotional. Extended delays may affect your eligibility for the capital gains tax (CGT) main residence exemption due to the operation of the “building concession”.
Most Australian resident individuals enjoy a full exemption from CGT when selling their main residence. To qualify, the property generally must have been your home for the entire period of ownership. Recognising that people may need to move out while building, renovating or repairing their home, the tax law provides a concession that allows you to continue treating the property as your main residence during the construction period.
How the building concession works
The building concession allows an individual to treat a dwelling as their main residence from the time they acquired the land for up to four years, provided certain conditions are met. These include:
• the dwelling becomes your main residence as soon as practicable after construction, renovation or repair is finished
• you live in the completed residence for at least three months
• you choose to apply the concession for the relevant period
The four-year period can start either:
• when you acquire the ownership interest in the land, or
• when you stop living in a dwelling that already existed on the land
This concession is intended to cover standard construction timelines. However, when delays occur and the works extend beyond four years, only a partial main residence exemption may be available.
Consequences of exceeding the four-year limit
If your project takes more than four years to complete, the portion of time beyond the four-year limit will not qualify as main residence days. This means a percentage of any future capital gain on sale will be taxable. The longer the delay, the greater the tax exposure.
This can come as an unwelcome surprise to homeowners who assumed that the main residence exemption would apply automatically, regardless of unforeseen delays such as:
• builder insolvency
• prolonged material shortages
• lengthy approval processes
• severe illness affecting the ability to proceed with works
Applying for an extension
The ATO recognises that some delays are beyond the control of homeowners. In limited circumstances, you may apply to the Commissioner of Taxation for discretion to extend the four-year period. This discretion is generally considered where delays are caused by:
• builder bankruptcy or collapse
• serious illness or incapacity affecting the homeowner or a close family member
• circumstances outside the homeowner’s control that prevent reasonable progress
If the Commissioner grants the extension, you may continue to treat the property as your main residence for the extended period and avoid a CGT liability that would otherwise arise.
Why planning matters
The financial impacts of losing part of the main residence exemption can be significant. Understanding the rules early can help you:
• plan construction timelines
• monitor delays that may cause exposure
• maintain records to support an ATO discretion application where necessary
• avoid unexpected CGT liabilities in the future
If you are experiencing delays or are concerned about how the CGT building concession may apply to your situation, seeking advice early is highly recommended.
Speak to one of our accountants today if you have any questions or need assistance with building delays.
Frequently Asked Questions
When does the 4 year building concession period start?
The period starts either when you acquire the land or when you move out of a dwelling already on the land before construction or renovation begins.
What happens if my build or renovation takes longer than 4 years?
If your project exceeds the 4 year limit, you may only receive a partial main residence exemption. This means part of any future capital gain could be taxable.
What evidence do I need when applying for an ATO extension?
Typically you’ll need documentation showing the cause of the delay, timelines of the project, contracts, correspondence with builders and any supporting evidence demonstrating the situation was beyond your control.
