Edited version of private advice

Authorisation Number: 1052266852682

Date of advice: 9 July 2024

Ruling

Subject: CGT - disposal of vacant land

Question

Can you disregard any capital gain or loss you make on the disposal of the vacant land at XXX under the main residence exemption?

Answer

No.

This ruling applies for the following periods:

Year ended DD/MM/20YY

Year ended DD/MM/20YY

The scheme commenced on:

DD/MM/20YY

Relevant facts and circumstances

On DD/MM/20YY you made a written offer, that was accepted for a block of vacant land at XXX. You agreed to settle on or around DD/MM/20YY.

Prior to acquiring the vacant land, during discussions with the vendor, he recommended a builder to you, this being Company A.

On DD/MM/20YY, you signed a contract with Company A for the construction of a single storey house on the vacant land.

On DD/MM/20YY, the vendor provided confirmation of settlement in writing.

On DD/MM/20YY, you paid Company A an initial deposit of $X.

On DD/MM/20YY, you received an email from Company A advising all building work was to be stopped until a review of finances and material costs had been completed.

Company A advised they intended to exercise a clause in the contract and increase the price of the build by XX%.

On DD/MM/20YY, you received an email from the director of Company A which stated that the building permit application had been put on hold, and he wished to cancel the building contract.

On DD/MM/20YY, you responded to this email advising you had sought advice from the Department of Mines, Industry Regulation and Safety (the department), and requested that Company A refund your initial deposit of $X or you would lodge a formal complaint with the department.

On DD/MM/20YY, Company A sent an email stating they were not attempting to cancel the contract, but instead wanted to discuss the project. The director advised he had ordered the materials and booked tradespeople and was ready to commence building, and that a building permit could be issued within days if you chose to continue with the project. He also added that you could cancel the contract by signing a deed of settlement and they would refund your deposit.

On DD/MM/20YY, you responded by email to Company A advising, that in your view, you believed they clearly attempted to cancel the building contract, and that you were not willing to sign a deed of agreement after receiving legal advice advising it was not legally necessary to do so.

On DD/MM/20YY, after several further interactions with the director of Company A, you both signed the deed of settlement of you received a refund of your deposit from the building company.

You then sold the block of vacant land and chose to purchase another already built property elsewhere.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Summary

You cannot disregard the capital gain or capital loss made on the sale of your vacant land where you intended to build a dwelling on it as your main residence but failed to do so.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common capital gains tax (CGT) event, CGT event A1, occurs when you dispose of a CGT asset to someone else. For example, if you sell a property. Land and dwellings are CGT assets.

Pursuant to section 118-110 of the ITAA 1997, you can generally disregard any capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it when:

•         the dwelling was your home for the whole period you owned it;

•         the dwelling was not used to produce assessable income; and

•         any land on which the dwelling is situated is not more than two hectares.

Section 118-135 of the ITAA 1997 provides "If a dwelling becomes your main residence by the time, it was first practicable for you to move into it after you acquired your ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence."

Whether the dwelling becomes the taxpayer's main residence as soon as practicable depends on the facts of each case.

The extension of the main residence exemption will not apply in the situation where a taxpayer purchases a property with the intention of occupying it as their main residence but never actually occupies the property (Couch and Commissioner of Taxation [2009] AATA 41) (Couch's case).

In Couch's case, the taxpayers acquired a property in the year 2000, with the intention of residing in it as their matrimonial home. However, due to employment circumstances, the property was rented out until it was sold in 2006, without the taxpayers having resided in it. The Administrative Appeals Tribunal (AAT) held, that the fact that the property was continually being leased and was not being occupied by the taxpayers because of employment circumstances was not enough to invoke section 118-135 of the ITAA 1997.

There are limited situations that enable the main residence exemption to be extended to vacant land, for those to apply there must be a dwelling that you have resided in during your ownership period.

Section 118-150 of the ITAA 1997 provides that the main residence exemption may be applied to land retrospectively for a maximum period of four years, provided that:

•         a dwelling is actually constructed on the land,

•         you move into the dwelling as soon as practicable after the construction is finalised; and

•         it continues to be your main residence for at least three months.

The mere intention to construct a dwelling or to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the main residence exemption.

Application to your circumstances

In your case, you purchased the Vacant Land, however construction of the dwelling never commenced. We accept that you intended to construct a dwelling on the Vacant Land but due to unforeseen circumstances, the dwelling was never constructed. The Vacant Land that you owned is a CGT asset and a CGT event happened to it when you disposed of it.

No matter how valid your reason for not being able to construct the dwelling and subsequently move into the dwelling, a mere intention to occupy a dwelling as your main residence without doing so is not sufficient to obtain the main residence exemption and there is no discretion available to the Commissioner to allow a main residence exemption on the sale of the Vacant Land. This means you cannot disregard any capital gain or loss under the main residence exemption. You will be liable for tax on any capital gain made on the disposal of the Property.

However, you will be entitled to claim a 50% discount on any capital gain because the acquisition date will be more than 12 months prior to the date of disposal.

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