Edited version of private advice

Authorisation Number: 1052144538318

Date of advice: 20 July 2023

Ruling

Subject: CGT - main residence exemption

Question

Can you disregard any capital gain or loss you make on disposal of the property?

Answer

No.

This private ruling applies for the following period

Income year ended XX XXXX 20XX

The scheme commenced on

X XXXX 20XX

Relevant facts and circumstances

You and your spouse signed a contract on the XX XXXX 20XX to purchase land. The cost of $X.

You signed up with a builder for a contract price of $X on the XX XXXX 20XX and paid the $X deposit.

Your intention was that this address become your principal place of residence as we do not own any other property and were living in rented accommodation.

On XX XXXX 20XX you received home loan with a bank for the construction of the dwelling.

You received a price increase for unseen material price increases on XX XXXX 20XX for $X. This made you ineligible for the government's first home builders' grant of $X which was available at the time and which depended on your intention to construct your principal place of residence.

A check with a city council late in 20XX confirmed the build had been approved and there was nothing holding up commencement.

In late XXXX 20XX you were due to commence site work which did not happen.

On X XXXX 20XX you received a letter from the building company director asking for an additional $X with no legal backing to this request.

You attended the builder's business premisses and had a one-on-one recorded meeting with the director and discussed the cost increases.

You became concerned that the builder was having financial difficulties.

You and your spouse discussed this and wanted to obtain legal representation. However, you opted to seek other building quotes and ultimately decided to terminate the contract with the builder due to the risk of their impending liquidation.

You obtained more quotes to build your home with other builders. Due to the conduct of the original builder you could no longer afford to build your home.

You sold the land for $X (less fees) on the XX XXXX 20XX.

The builder refunded your deposit less $X which they claimed was services rendered, such as a survey report.

You looked for a house to purchase and found another place and purchased it for $X; settling on X XXXX 20XX. You are living in this house as your primary place of residence.

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 118-135

Income Tax Assessment Act 1997 section 118-150

Reasons for decision

Summary

You cannot disregard the capital gain or capital loss made on the sale of your vacant land where you intended to build a dwelling on it as your main residence but failed to do so.

Detailed reasoning

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.

Section 118-135 of the ITAA 1997 provides "If a dwelling becomes your main residence by the time it was first practicable for you to move into it after you acquired your ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence."

Whether the dwelling becomes the taxpayer's main residence as soon as practicable depends on the facts of each case.

The extension of the main residence exemption will not apply in the situation where a taxpayer purchases a property with the intention of occupying it as their main residence but never actually occupies the property (Couch and Commissioner of Taxation [2009] AATA 41) (Couch's case).

In Couch's case, the taxpayers acquired a property in 2000 with the intention of residing in it as their matrimonial home. However, due to employment circumstances, the property was rented out until it was sold in 2006, without the taxpayers having resided in it. The Administrative Appeals Tribunal (AAT) held that the fact that the property was continually being leased and was not being occupied by the taxpayers because of employment circumstances was not enough to invoke section 118-135 of the ITAA 1997.

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 a sole or principal residence, but without actually doing so, is insufficient to obtain the main residence exemption.

Application to your circumstances

The laws relating to capital gains tax do not give the Commissioner any discretionary powers to disregard the capital gain or capital loss made on the sale of vacant land where the individual intended to build a dwelling as their main residence but fails to do so due to factors outside their control such as cost increases and the builder going into liquidation.

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 118-110 of the ITAA 1997 to the sale of the vacant land. Also, the requirement of section 118-135 of the ITAA 1997 cannot be met if no dwelling exists to move into.

As the Commissioner has no discretion to disregard any capital gain or capital loss and you are unable to apply section 118-110 of the ITAA 1997, you are not entitled to claim any main residence exemptions on the sale of the vacant land. Therefore, the land that you and your spouse owned is a CGT asset and a CGT event happened to it when you disposed of it. As it was not your main residence for any part of the ownership period you will not be entitled to an exemption from CGT.

As you owned the land with your spouse, any net capital gain or loss resulting from its disposal will be shared with your spouse based on your respective ownership interests.

Because you held your ownership interest in the land for more than 12 months, you are entitled to discount your capital gain using the 50% discount method to your ownership interest after applying any capital losses (including losses from earlier years).