Edited version of private advice

Authorisation Number: 1052239380651

Date of advice: 10 April 2024

Ruling

Subject: CGT - main residence exemption

Question

Can you disregard the capital gain made on the sale of the property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX June 20XX you married your spouse.

In September 20XX you and your spouse signed a contract for a house and land package, with the aim of building a home for you both to live in as your main residence.

The address of the property was X (the Property).

On XX November 20YY the construction of the dwelling on the Property began.

You encountered obstacles due to COVID, resulting in delays in material supplies, but you continued to persevere.

In January 20XX, you and your spouse separated.

In March 20XX you took possession of the Property.

Neither you nor your spouse moved into the dwelling at any time during your ownership period.

You tried to maintain communication and share financial responsibilities, however your spouse declined to contribute to the repayments, which placed a significant burden on you.

Disputes and a legal battle followed, and you made the decision to sell the Property.

On XX March 20XX settlement for the sale of the Property occurred.

You made a capital gain on the disposal of the Property.

On XX October 20XX the divorce order took effect.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3.1

Income Tax Assessment Act 1997 Part 3.3

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 section 102-3

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gains tax (CGT) event occurs when any disposal, sale or transfer of a CGT asset occurs. Generally, when you dispose of a CGT asset, a CGT event will result in a capital gain or capital loss which is included in your assessable income. However, there are a number of provisions in Parts 3-1 and 3-3 of the ITAA 1997which provide exceptions, exemptions, and roll-overs that provide relief from CGT in some specific situations.

Section 118-110 of the ITAA 1997allows you to disregard a capital gain or capital loss incurred on the sale of your main residence under the following conditions:

•         you are an individual; and

•         the dwelling was your main residence throughout your *ownership period; and

•         the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.

The main residence exemption is extended to land undergoing construction or renovation of a dwelling by section 118-150 of the ITAA 1997.

If a taxpayer builds a dwelling on land, and the dwelling becomes the taxpayer's main residence as soon as the work is finished, section 118-150 of the ITAA 1997 provides that the taxpayer can choose to apply the main residence exemption as if the dwelling was the main residence from the time the land was acquired until the dwelling becomes their main residence.

However, to be able to apply this choice you need to move into the completed dwelling as soon as practicable after it has been completed, and the dwelling must continue to be your main residence for at least 3 months after you moved into it.

The time limit during which section 118-150 of the ITAA 1997 permits this choice to operate is the shorter of the following two periods:

•         four years before the dwelling actually becomes the taxpayer's main residence, or

•         the period starting when the taxpayer acquired the ownership interest in the land and ending when the dwelling became the taxpayer's main residence.

You will not be entitled to the main residence exemption when you have never occupied the dwelling as your main residence. The mere intention to occupy a dwelling as your main residence, without actually doing so, is insufficient to obtain the exemption.

Where no exception, exemption, or rollover applies, sections 102-3 and 115-100 of the ITAA may operate to reduce your CGT liability by 50% where you have incurred a capital gain from disposing of a CGT asset which you have held for at least 12 months.

Application to your situation

In your case, you and your Spouse purchased a house and land package with the intention to reside in the home once constructed, as your main residence.

Due to unforeseen circumstances, once the construction was completed, neither you nor your Spouse moved into the dwelling and resided in it at any stage during your ownership period.

As neither you nor your Spouse resided in the dwelling at any stage, you do not meet the conditions under sections 118-110 or 118-150 of the ITAA 1997 to obtain the main residence exemption.

Therefore, you cannot apply the main residence exemption to the disposal of your ownership interest in the property.

Furthermore, the Commissioner does not have any discretion to allow you to disregard a capital gain or capital loss unless that power is explicitly bestowed upon the Commissioner under a provision in the taxation law. However, while no exception, exemption, or rollover is available in your situation, you can apply the 50% CGT discount to the capital gain you incurred as you have held the property for a duration greater than 12 months.

As you cannot apply the main residence exemption to the sale of the property, the net capital gain after the application of the 50% CGT discount will be included in your assessable income.

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