Edited version of private ruling

Authorisation Number: 1011847063217

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Ruling

Subject: Capital gains tax

Question and answer:

Are you entitled to disregard any capital gain you make on the sale of a vacant block of land?

No.

This ruling applies for the following period:

1 July 2011 to 30 June 2013.

The scheme commenced on:

1 July 2011.

Relevant facts:

You own a vacant block of land (the land).

You acquired the land about 1X years ago with the intention of building a family home on the land.

You now intend to sell the land without building on it.

You will make a capital gain on the sale of the land.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-5.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-150.

Reasons for decision

Capital gains tax - general

Vacant land is a capital gains tax (CGT) asset.

If you own a CGT asset and a change of ownership occurs from you to another person or entity, you have disposed of the asset.

When you dispose of a CGT asset, CGT event A1 happens. In the case of real estate, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place.

When a CGT event happens to a CGT asset you own, you make a capital gain or loss at the time of the event, depending on whether the capital proceeds from the CGT event are more or less than the cost base/reduced cost base of the CGT asset.

In some cases, an exemption may apply that allows a taxpayer to reduce, or disregard (and therefore not include in their assessable income), any gain or loss made as a result of a CGT event. Where applicable, such exemptions are provided for by the tax law.

If no exemption applies, any assessable gain made from a CGT event is included in your assessable income in the income year in which the event happens.

The Commissioner has no authority to allow a taxpayer to reduce or disregard any assessable gain outside of the exemptions provided for by the tax law.

CGT exemptions for real estate

In the case of real estate acquired on or after 20 September 1985, section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides an exemption from CGT if the asset being disposed of is the main residence of the taxpayer throughout their ownership period (the main residence exemption).

For the main residence exemption to apply, you must have occupied a dwelling on the property. A mere intention to construct and occupy a dwelling as a main residence, without actually doing so, is insufficient to obtain the main residence exemption (Couch & Anor v. FC of T 2009 ATC 10-072; [2009] AATA 41).

Section 118-150 of the ITAA 1997 extends the main residence exemption to vacant land in which you have an ownership interest, provided you build a dwelling on the land and the dwelling becomes your main residence. Under this section, you may choose to apply the main residence exemption to the period from when you acquire your ownership interest in land until a dwelling is constructed and becomes your main residence. However, the period before a dwelling is constructed and becomes your main residence may not exceed four years from the time you become the owner of the land. In addition, the dwelling must become your main residence as soon as practicable after the construction of a dwelling is completed and must continue to be your main residence for at least three months.

Conclusion

You purchased the land with the intention of constructing a dwelling on the land and occupying that dwelling as your main residence. You now intend to sell the land without either constructing or occupying a dwelling on the property as your main residence. Therefore:

· you are not entitled to a main residence exemption under section 118-110 of the ITAA 1997 on any capital gain made on the sale of the land, and

· the extension to the main residence exemption set down in section 118-150 of the ITAA 1997 is also not applicable to your circumstances.

There are no provisions within the legislation that give the Commissioner a discretion to allow you to disregard a capital gain on the sale of land that was never your main residence.