Edited version of private advice

Authorisation Number: 1051892392830

Date of advice: 15 September 2021

Ruling

Subject: CGT - main residence exemption

Question

Can you disregard any capital gain you make on the sale of Block A?

Answer

No.

This ruling applies for the following period periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

Person A and Person B (You) purchased a property (Property A) sometime after 20 September 1985 and occupied the house on it as your main residence (Dwelling A).

The dwelling was built in XX years ago and was old and small. The structure of the dwelling was deteriorating and the roof of the lounge even collapsed. The insurance company denied paying the damage as the ceiling was quite old.

A number of years later, while continuing to live in Dwelling A, You purchased the property next door as an investment (Property B).

The house on Property B (Dwelling B) was bigger and in better condition than Dwelling A.

You and your family moved into Dwelling B.

You rented out Dwelling A for about X years. You did some repairs to Dwelling A before renting it out, however you still struggled to find tenants consistently during this period due to the condition of the dwelling.

Over the last few years, the zoning in your area has been changed from 'R' to 'R20' which allowed old homes to be demolished and properties to be subdivided.

Neither of your properties qualified to be subdivided as they were not big enough on their own.

You are looking towards retirement and planning to reduce the amount of your home loan. Subdividing these properties was part of your plan to help you to do this.

You planned to subdivide the two blocks being Property A and Property B into three new blocks. The plans include having Dwelling A demolished, and taking land from Property B to add to the middle of the three new blocks, upon which you plan to build a new family home upon.

You planned to keep two of the new blocks and sell one.

After the subdivision, the new blocks would comprise the following:

Block A: Vacant land of approximately XXX.XX square metres was to be gifted to your child.

Block B: The middle block, with vacant land upon which you will build a new home and occupy it as your main residence.

Block C: Land containing the existing Dwelling B, which was to be sold.

By following this plan you believed it would reduce the amount outstanding on your home loan, and create a comfortable retirement plan for your future.

Just recently, Dwelling A was demolished and you have conditional subdivision approval.

You have had some issues with the neighbours since they moved in a few years ago, and these issues have escalated since starting the process of subdivision. They will be the neighbours of Block A.

Given this and your child's attachment to the Dwelling B that you are currently residing in, your plans have changed. You now wish to sell Block A instead of selling Block C.

Block A will be sold as vacant land (no dwelling).

Assumptions

For the purpose of this ruling, it is assumed that:

•         Block A will be sold within the period of this ruling.

•         You will make a capital gain upon the disposal of Block A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-160

Reasons for decision

To receive a capital gains tax (CGT) main residence exemption section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

A capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual; and

(b) the dwelling was your main residence throughout your ownership period; and

(c) 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.

Section 118-120 of the ITAA 1997 applies the CGT main residence exemption to any adjacent land that is subject to the same CGT event (up to a maximum of two hectares).

However, section 118-165 of the ITAA 1997 denies the CGT main residence exemption to a CGT event that happens in relation to land if that same CGT event doesn't also happen to the dwelling.

An extension to the exemption is available under section 118-160 of the ITAA 1997 allowing you to treat vacant land as having a dwelling on it when a CGT event happens. This exception only applies if a dwelling that is your main residence is accidently destroyed and a CGT event happens in relation to the land on which it was built without you erecting another dwelling on the land. For example, a dwelling that is destroyed in a bushfire, but the owners choose to sell the now vacant land instead of re-building a new home.

Your situation

In your case, the CGT asset that you are disposing is vacant land. There is no dwelling attached.

There was previously a dwelling (dwelling A) on Block A that was intentionally demolished. Dwelling A was not accidently destroyed, so section 118-160 of the ITAA 1997 cannot apply to you to treat the vacant land as having a dwelling on it.

As there is no dwelling attached to Block A, you do not meet the conditions under section 118-110 of the ITAA 1997 and the main residence exemption cannot be applied to any capital gain that you make on its disposal. The main residence exemption is also denied by section 118-165 of the ITAA 1997.

In addition, please note that the Commissioner does not have any discretion to allow you to disregard a capital gain or capital loss where no exemption is available to you under the taxation law.