Edited version of private advice

Authorisation Number: 1052232231140

Date of advice: 21 March 2024

Ruling

Subject: CGT - disposal of vacant land

Question

Can you disregard any capital gain or loss you make on the disposal of the vacant land at XXXXXXXXXX, State of A (the Vacant Land) under the main residence exemption?

Answer

No.

Summary

You cannot disregard the capital gain or capital loss made on the sale of the Vacant Land where you intended to build a dwelling on it as your main residence but failed to do so. A mere intention to occupy a dwelling as your main residence without doing so is not sufficient to obtain the main residence exemption. There is no discretion available to the Commissioner to allow a main residence exemption on the sale of vacant land, no matter how valid your reason for not being able to construct the dwelling and to subsequently move into the dwelling.

This means you cannot disregard any capital gain or loss under the main residence exemption. You will be liable for tax on any capital gain made on the disposal of the Property. However, you will be entitled to claim a 50% discount on any capital gain because the acquisition date was more than 12 months prior to the date of disposal.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On DD MM 20XX, you and Person A acquired the Vacant Land. You intended to construct a dwelling on the Vacant Land as your main residence.

Prior to acquiring the Vacant Land, on or around DD MM 20XX, a preliminary construction contract was drafted by the Developer, for your chosen home design. Due to financing issues, construction was not immediately commissioned.

In MM 20XX, you paused your plans to commence construction due to uncertainty arising from the global pandemic and the subsequent impact on your future employment, the global shortage of building materials, funding uncertainty and escalating prices.

Between 20XX and 20XX, you were diagnosed with a number of medical conditions which resulted in you ceasing employment which adversely affected your financial position.

Due to your ill health and the subsequent impact on your financial situation, you were no longer able to secure the necessary finance to commence construction of the dwelling on the Vacant Land. You were also unable to continue servicing the loan for the Vacant Land.

In MM 20XX, the Vacant Land was sold with settlement occurring in MM 20XX.

During this period, you did not have an ownership interest in any other property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subdivision 115-A

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

Main residence exemption - building a new home

Pursuant to section 118-110 of the Income Tax Assessment Act 1997 (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.

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 the year 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

In your case, you purchased the Vacant Land, however construction of the dwelling never commenced. We accept that you intended to construct a dwelling on the Vacant Land but due to unforeseen personal circumstances, the dwelling was never constructed. The Vacant Land that you and Person A owned is a CGT asset and a CGT event happened to it when you disposed of it.

No matter how valid your reason for not being able to construct the dwelling and subsequently move into the dwelling, a mere intention to occupy a dwelling as your main residence without doing so is not sufficient to obtain the main residence exemption and there is no discretion available to the Commissioner to allow a main residence exemption on the sale of the Vacant Land. This means you cannot disregard any capital gain or loss under the main residence exemption. You will be liable for tax on any capital gain made on the disposal of the Property.

However, you will be entitled to claim a 50% discount on any capital gain because the acquisition date will be more than 12 months prior to the date of disposal.