Edited version of private advice

Authorisation Number: 1052177784248

Date of advice: 9 October 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Are you entitled to apply the main residence exemption for the disposal of two lots of land (the Property) under section 118-160 of the Income Tax Assessment Act 1997 after your home built on the land was destroyed by flood?

Answer

Yes

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

30 June 20XX

The scheme commenced on:

XX February 20XX

Relevant facts and circumstances

The taxpayers acquired their property in 20XX.

The home at the Property was built across Lot A and Lot B which are two lots of land next to each other. This was the taxpayers' principal place of residence and they resided at this home until it was destroyed by floods causing structural damage to the home. As a result of the damage suffered to the home it was demolished and the taxpayers had to relocate.

The taxpayers will not be rebuilding their home. Instead, the taxpayers would like to purchase an existing property.

The taxpayers have not purchased a new home and are waiting for sale proceeds to purchase a new home. They are not changing main residences.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-25(1)

Income Tax Assessment Act 1997 section 104-20(1)

Income Tax Assessment Act 1997 section 118-110(1)

Income Tax Assessment Act 1997 section 118-110(2)(a)

Income Tax Assessment Act 1997 section 118-115(1)

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-130(1)

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 section 118-160

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Summary

The taxpayers are entitled to the full main residence exemption under subsection 118-110(1) of the Income Tax Assessment Act 1997. The home on the Property has been destroyed and under section 118-160 the land will continue to qualify for the main residence exemption until you no longer have an ownership interest. As such given the home was built on the Property, which is across two lots, both lots of land when sold will qualify for the main residence exemption. This includes the period from when you moved out of the home after the floods until you sell the Property.

Detailed reasoning

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

If you are an individual (not a company or trust) you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (also referred to as 'your home').

To qualify for the full main residence exemption from CGT you must satisfy the following:

•         the dwelling must have been your home for the whole period you owned it

• you must not have used the dwelling to produce assessable income
• any land on which the dwelling is situated must be 2 hectares or less, and
• you must not be an excluded foreign resident at the time the CGT event occurs.

You are taken to have made the choice for the main residence exemption under subsection 103-25(1) when you lodge your tax return for the year in which the CGT event happened (or within a further time allowed by the Commissioner).

Subsection 118-110(1) provides that a capital gain or loss will be exempt where:

(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.

Paragraph 118-110(2)(a) provides that the relevant CGT events include a CGT event C1. Subsection 104-20(1) states that a CGT event C1 happens at the time the CGT asset you own is lost or destroyed.

A dwelling is defined in subsection 118-115(1) as:

(a)  a unit of accommodation that:

(i)    is a building or is contained in a building; and

(ii)   consists wholly or mainly of residential accommodation; and

(b)  a unit of accommodation that is a caravan, houseboat or other mobile home; and

(c)   any land immediately under the unit of accommodation.

Section 118-125 defines ownership period as:

Your ownership period of a *dwelling is the period on or after xx September 19xx when you had an *ownership interest in:

(a)  the dwelling; or

(b)  land (*acquired on or after xx September 19xx) on which the dwelling is later built.

Subsection 118-130(1) defines ownership interest in land or dwelling as:

(a)  for land - you have a legal or equitable interest in it or a right to occupy it; or

(b)  for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

(c)   for a flat or home unit - you have:

(i)    a legal or equitable interest in a *stratum unit in it; or

(ii)   a licence or right to occupy it; or

(iii)  a *share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

Section 118-140 provides that:

(1)   If you *acquire an *ownership interest in a *dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

(a)  6 months ending when your ownership interest in your existing main residence ends; or

(b)  the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends.

(2)   Subsection (1) only applies if:

(a)  your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and

(b)  your existing main residence was not used for the *purpose of producing assessable income in any part of that 12 month period when it was not your main residence.

Section 118-160 states that:

(1)  This section applies if a *dwelling that is your main residence is accidentally destroyed and a *CGT event happens in relation to the land on which it was built without you erecting another dwelling on the land.

(2)  You can choose to apply this Subdivision to the land as if, from the time of the destruction until your *ownership interest in the land ends, the *dwelling had not been destroyed and were your main residence.

(3)  If you do so, you cannot treat any other *dwelling as your main residence during that period, except under section 118-140 (about changing main residences).

Application to your circumstances

The taxpayers satisfy the requirements in subsection 118-110(1) for the Property to be exempt from capital gain or loss as they are individuals, the dwelling was their main residence throughout their ownership period and the interest in the Property did not pass to them as a beneficiary.

As per subsection 104-20(1) and paragraph 118-110(2)(a) the destruction of their home as a result of floods, is a relevant CGT event C1 for the exemption in subsection 118-110(1).

For the purposes of paragraph 118-115(1)(a) your home was a dwelling, and your ownership period of the dwelling as provided in section 118-125 was from when you purchased the Property. The ownership interest pursuant to paragraph 118-130(1)(c) occurs where there is a legal or equitable interest in the Property. Your ownership interest in the land will end when your ownership interest ends by selling the lots.

For the main residence exemption to apply to your circumstances the following conditions must be met:

• the dwelling was your main residence at the time of the accidental destruction (subsection 118-160(1)),
• no other dwelling was built on the land, excluding temporary accommodations (subsection 118-160(3)),
• the property is used for a private or domestic nature, and
• no other dwelling can be treated as your main residence during this period (118-160(3)).

Based upon your circumstances you have met the above conditions as your home was your main residence at the time of the accidental destruction including natural disasters like floods, no other dwelling has been built upon the land, the Property is still being used for a private or domestic nature and no other dwelling has been treated as your main residence.

To apply the main residence exemption to your Property subsection 103-25(1) provides that you must choose to apply the concession when you lodge your income tax return for the income year when CGT event C1 occurred which would be when the home was destroyed.

Your principal place of residence is not subject to CGT and the main residence exemption will continue to apply to each the Property that the dwelling was built on until they are sold.