Edited version of private advice

Authorisation Number: 1051950008226

Date of advice: 14 February 2022

Ruling

Subject:CGT - main residence exemption -sale of vacant land

Question:

Is any capital gain or capital loss made on the sale of the Property disregarded?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

You, purchased a vacant lot of land (the Property) in the later part of a year, after 20 September 1985, on which to construct your dream house in which to live in.

You sold your main residence (Property B) with settlement occurring after you purchased the Property.

After settlement on the purchase of the Property occurred, you undertook preparatory activities in relation to the construction of the house on the Property during several of the following years such as:

•         the engaging of the services of a party to manage the construction of the house (Company A)

•         paying invoices in relation to town planning/drawings of the design of the house, engineering and other costs

•         getting quotes and making enquiries about costs associated with a septic tank and electricity connection to the Property

•         lodging a planning application and amended plan

•         obtaining a Bush Fire Management Plan, Land Management Plan and site classification report; and

•         obtaining structural computations and final engineering details.

After not having any communication from Company A despite making several attempts, they contacted you to advise that they would no longer be dealing with you in relation to the construction of the house for the reasons they provided.

You contacted several builders to obtain quotes for the construction of the house and decided to use one of them (Company B) and during the following months you were provided with preliminary agreement costs, and a significant number of preliminary designs for your approval.

A draft contract with Company B was prepared however there were some doubled up items and you decided not to continue with Company B and the construction of a house on the Property due to the price being outside of your budget.

You decided to purchase an established house and sold the Property.

Several years after settlement on the purchased of the Property occurred you entered a contract of sale of the Property.

You resided with your relatives while you were undertaking activities to construct a house on the Property during your ownership period until it was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Capital gains tax

The intention of the capital gains tax (CGT) provisions is to be applied broadly when a capital gains tax (CGT) event occurs.

The most common CGT event is CGT event A1 which occurs when the ownership in the CGT asset is transferred to another entity, such as when the asset is sold.

You make a capital gain if the capital proceeds are more than the cost base of the CGT asset. You make a capital loss if the capital proceeds are less than the reduced cost base of the CGT asset.

Most property, except for your main residence, is subject to CGT. This includes vacant land.

If no main residence exemption is applicable to vacant land being sold, any capital gain or capital loss made on its disposal will be determined using the general CGT provisions.

Main residence exemption

The main residence exemption enables individuals to disregard a capital gain or capital loss made on the disposal of a dwelling that they had lived in, that was their main residence during their ownership period, and was not used to earn assessable income.

The primary condition for the main residence exemption to apply is that a CGT event occurs to the dwelling, such as when the dwelling is sold.

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

•         Under section 118-120 of the Income Tax Assessment Act 1997 (ITAA 1997) the main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling that is your main residence. The vacant land must be sold in the same sale transaction with the dwelling that was your main residence.

•         Under section 118-150 of the ITAA 1997, enables you to choose to extend the main residence exemption to the shorter of the following periods in relation to vacant land when you are constructing a dwelling on land that you already own:

-   four years before the dwelling becomes your main residence, or

-   the period starting from when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.

However, you cannot make this choice if the dwelling is not constructed, you do not move into the dwelling as soon as practicable and/or continue to reside in the dwelling for at least three months.

•         Under section 118-160 of the ITAA 1997, if your main residence is accidentally destroyed and you then dispose of the vacant land on which it was built, you can choose to apply the main residence exemption as if the dwelling had not been destroyed and continued to be your main residence. However, there must be a dwelling located on the vacant land that was destroyed.

Application to your situation

In your situation you purchased the Property to construct a house in which you intended living. However, you incurred issues with the original builder and then in relation to your endeavour to engage with other parties to construct the house.

You made the decision to sell the Property and it was sold as you had purchased it, being vacant land on which there was no dwelling.

Your main residence during the period while you were undertaking the activities to construct the house on the Property was your relative's house, where you continued to live until the Property was sold.

The Commissioner has no discretion to treat vacant land as having had a dwelling on it when the CGT event happens.

While we appreciate and acknowledge that your intention had been to construct a dwelling on the Property that you wanted to live in, and the issues you had experienced in trying to do 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.

Therefore, you cannot disregard any capital gain or capital loss made on the sale of the Property.

Note: If you meet the conditions in Division 115 of the ITAA 1997 you will be entitled to reduce any capital gain by the 50% CGT discount.