Edited version of private advice

Authorisation Number: 1051991836391

Date of advice: 24 June 2022

Ruling

Subject: CGT - main residence

Question

Can you claim the main residence capital gains tax exemption under section 118-150 of the Income Tax Assessment Act 1997 on the sale of vacant land?

Answer

No.

This ruling applies for the following:

Year ended 30 June 20XX.

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You resided in Property 1.

You decided to move to be closer to your family.

You entered into a contract to purchase vacant land closer to your family.

Your intention at the time you purchased the vacant land was to build a dwelling on it and to occupy it as your main residence.

There was a delay in settlement that meant you had to wait to get the house build underway.

You entered into a contract to sell Property 1.

Approximately five months after you entered into a contract to purchase the vacant land settlement occurred on Property 1.

As Property 1 was sold, you rented a dwelling.

Settlement was further delayed on the purchase of the vacant land.

The vacant land was purchased during the Covid outbreak.

Covid related matters such as the unavailability of builders and the unavailability of materials resulted in delays to the proposed build.

Due to the delays in the proposed build and your lease due to expire on your rental property, you become extremely concerned about becoming homeless.

You were able to rent another property whilst the proposed build was underway.

The rental property market was very tight by this time. Property prices began increasing due to housing shortage and the influx of people.

With the stress of being homeless, living interstate, and Covid lockdowns, you decided to buy an existing home instead of waiting for your home to be built on the vacant land you intended to live on.

Less than 12 months after you entered into a contract to purchase the vacant land you entered into a contract to purchase an existing residence as your new main residence.

As a result of the housing shortage, you had to pay increased prices for the new main residence property.

Less than 12 months after you entered into a contract to purchase the vacant land you entered into a contract to sell your vacant land.

Due to shortage of properties, the vacant land had increased in value.

A short time later the following occurred:

•         settlement occurred on the purchase of an existing residence as your new main residence

•         settlement occurred on the vacant land and

•         you moved into the existing residence as your new main residence.

Reasons for decision

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.

Under 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.

You are only able to treat one dwelling as your main residence at any time (apart from limited circumstances where you are changing main residences).

You only get a partial exemption for a CGT event that happens in relation to your ownership interest in a property if the dwelling was your main residence for only part of your ownership period.

A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time.

However, 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 your principal residence, but without actually doing so, is insufficient to obtain the main residence exemption.

In your circumstance you purchased vacant land with the intention to build a dwelling on it and treating it as your main residence.

You encountered some delays in the initial stages of the building process.

After the purchase of the vacant land further delays were experienced due to Covid such as the unavailability of builders and the unavailability of materials at the time you wanted to build.

Because of the delays you experienced in the building process you decided to purchase an existing residence and sell the vacant land.

Application to your circumstances

There's no reference in the capital gains tax legislation that gives the Commissioner any discretionary powers to disregard the capital gain or capital loss made on the sale of vacant land, where the individual/s intend to build a dwelling as their main residence but fails to do so due to Covid related impacts.

The mere intention to construct a dwelling on vacant land as your principal place of residence, but without actually doing so, is insufficient to apply section 118-150 of the ITAA 1997 to the sale of the vacant land.

As the Commissioner has no discretion to disregard any capital gain or capital loss and you are unable to apply section 118-150 of the ITAA 1997, you are not entitled to claim any main residence exemptions on the sale of the vacant land.

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 118-150