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Edited version of your written advice

Authorisation Number: 1013063582700

Date of advice: 2 August 2016

Ruling

Subject: Main residence exemption

Question 1

Can you disregard any capital gain or loss made on the disposal of a property you intended to be your main residence?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20ZZ

Relevant facts and circumstances

In 20XX you and your spouse put down a deposit to purchase a block of land.

The land was scheduled to be titled at 12 months after your deposit was placed however due to a delay out of your control the land was not titled until 20ZZ.

In 20YY you put down an initial deposit with a building company, with a further payment for construction which occurred in 20ZZ.

Building commenced at a period in time however came to a stop four weeks later.

You received correspondence from an administrator who acts for the building company, which notified you that they had gone into administration.

You then received a letter from the administrators notifying you that your house was not chosen to be completed. You submitted a building claim which did not cover the full amount of your build leaving you out of pocket a sum of money.

You advised that you have been left with a limited amount of choices due to the building company going into liquidation.

Due to an increase in housing prices and building prices you are left with no real option but to sell the land as is.

In 20ZZ you met with someone from a real-estate to sell your block.

You intended to sell the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 118-35

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Capital Gains Tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a CGT event to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.The most common capital gains tax (CGT) event is CGT event A1. This occurs when ownership of a CGT asset is disposed of. The sale of the vacant block of land would be considered to be a CGT event A1.

A taxpayer will make a capital gain if their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset. A taxpayer will make a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.

Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate.

CGT - main residence

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for a full exemption, the dwelling must have been your main residence for the whole period you owned it and must not have been used to produce assessable income.

Generally, if you build a dwelling on land you already own, the land does not start to qualify for an exemption under the main residence exemption provisions until the dwelling actually becomes your main residence.

Section 118-150 of the ITAA 1997 allows you to apply the main residence exemption to land for up to four years before you build a dwelling that becomes your main residence. You can only make this choice if the dwelling becomes your main residence as soon as practicable after the building work is finished and it continues to be your main residence for a minimum of three months (subsection 118-150(3) of the ITAA 1997).

Taxation Determination TD 51 states that whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to: 

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

Application to your circumstances

In your case, the mere intention to construct a dwelling on the vacant block of land and to then occupy the dwelling as your main residence, without actually doing so, is insufficient to obtain the exemption.

Whilst we appreciate the change in your circumstances and acknowledge your intention to construct a dwelling on the block of land which would become your main residence, the fact remains that you did not do so. Therefore, you will not be able to apply the main residence exemption upon the sale of the vacant block of land.

Accordingly you are required to declare any capital gain in your tax return in the financial year the property is disposed of.

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