Edited version of private advice

Authorisation Number: 1051986355336

Date of advice: 27 May 2022

Ruling

Subject: CGT - exemptions - main residence

Question

Will the main residence exemption apply to the sale of a block of land you own?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse have a block of vacant land (the property).

You purchased the property with your spouse under contract in 20XX.

Settlement of the property occurred in 20XX.

The property has a total area of more than 2 hectares.

You have lived in rental accommodation since purchasing the property.

You intended to build your main residence on the property.

You sought pre-lodgement advice from State Assessment and Referral Agency (SARA).

You received a quote from Builder A to build your main residence in 20XX.

You received a quote from Builder B to build your main residence in 20XX.

You engaged Architect A to design the building plans for Builder B in 20XX.

You received a revised quote from Builder A in 20XX.

You received a revised quote from Builder B in 20XX.

Fixed interest rates in August 20XX were 2.19% but are currently 3.5-3.8% for the same loan product.

You believe that the increase in the building costs and interest rates would incur an excessive level of debt to build your main residence therefore you intend to sell the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Section 118-110 of the Income Tax Assessment Act (ITAA 1997) details the basic case for the main residence exemption. It enables you to disregard a capital gain or loss made on the disposal of a dwelling, provided you are an individual, the dwelling was your main residence during your ownership period, and you have not used the dwelling to produce assessable income.

Subsection 118-115(1) of the ITAA 1997 defines a dwelling as a unit of accommodation that is:

•         a building, or contained in a building of wholly or mainly residential accommodation,

•         a caravan; houseboat, or other mobile home, and

•         the land immediately under the accommodation.

Generally, a dwelling is considered your main residence if:

•         you and your family live in it,

•         your personal belongings are in it,

•         it is the address your mail is delivered to,

•         it is your address on the electoral roll, and

•         services such as gas and power are connected.

Additionally, under subsection 118-120(3) of the ITAA 1997 for the main residence exemption to apply, any land on which the dwelling is situated must be two-hectares or less.

The primary condition for the main residence exemption to apply is that a CGT event occurs to a dwelling, for instance, when a dwelling and the land it is situated on is sold. The legislation has only limited situations that enable the main residence exemption to be extended to vacant land. For those to apply, a dwelling must have existed on the property that you have resided in during your ownership period.

In relation to the edited advice quoted in your request, section 118-150 of the ITAA 1997 does contain a provision to allow an extension of time that a vacant block of land can be included in the main residence exemption when you build, renovate, or repair a dwelling.

For example, you purchase a vacant block of land, construct a dwelling (your home) over the first two-years, you move in and the dwelling becomes your main residence on completion in the third year, then you were to sell the property seven-years later. Under section 118-150 of the ITAA 1997, you are able to claim the full main residence exemption from when you purchased the vacant land to when you sold the property, including the first years as a vacant block as your main residence.

Subsection 118-150(4) of the ITAA 1997 limits the time in which this extension can apply to the shorter period of either four-years, or the period starting from when you purchased or acquired the land and ending when the dwelling becomes your main residence. This subsection also has a provision for the Commissioner's discretion to allow a longer time and you have included one of the instances where the Commissioner may grant this discretion.

However, subsection 118-150(3) of the ITAA 1997 outlines that you can only apply this provision once a dwelling that you construct, repair, or renovate becomes your main residence, by moving-in as soon as practicable after the work is finished and continuing to reside in the dwelling for at least three months.

Though section 118-150 of the ITAA 1997 does provide a provision to enable you to choose to extend the main residence exemption to vacant land, it is only applicable when you have constructed a dwelling that is your main residence on that land.

As you have not begun construction of a dwelling and are choosing to sell the property as vacant land, you have not met the requirements of subsection 118-150(3) of the ITAA 1997, therefore the Commissioner's discretion of paragraph 118-150(4)(a) of the ITAA 1997 cannot apply to your circumstances.

Finally, section 118-110 of the ITAA 1997 does not allow the main residence exemption to apply to a vacant block of land where a dwelling has not been constructed. For further information regarding your main residence, go to ato.gov.au and search for 'QC 66028'.