Edited version of private advice

Authorisation Number: 1052244470697

Date of advice: 13 June 2024

Ruling

Subject: Commissioner discretion - main residence exemption

Question

Will the Commissioner exercise his discretion to extend the four-year time period under section 118-150 of the Income Tax Assessment Act 1997 in relation to the dwelling?

Answer

Yes, to the extent that you can claim the main residence exemption from capital gains tax (CGT) up to a maximum area of two hectares including the area of land on which the dwelling is situated.

If your land is used for private purposes and is greater than 2 hectares, you can choose which 2 hectares are exempt, the rest is subject to CGT.

If any part of the land is used to produce income it is not exempt. This is the case even if the total land area is less than 2 hectares. The 2 hectares you choose must include the land that is under your dwelling.

Further information regarding the two-hectare limitation can be found by searching 'QC 66037' on ato.gov.au.

This ruling applies for the following periods:

Year ended DD/MM/20YY

Year ended DD/MM/20YY

Year ended DD/MM/20YY

Year ended DD/MM/20YY

Year ending DD/MM/20YY

The scheme commenced on:

DD/MM/20YY

Relevant facts and circumstances

You (Person A and Person B) purchased a dwelling located at XXX (Property 1) on DD/MM/20YY.

The size of the land on which the dwelling stands is greater than 2 hectares.

You continued to rent in City A due to work commitments, whilst spending most weekends and holidays at Property 1.

Between MM/20YY and MM/20YY, you listed Property 1 through a digital platform and had several guests utilise the property.

A short time later you moved permanently into Property 1 as your family home.

On DD/MM/20YY you safely evacuate Property 1 following a warning of an impending natural disaster.

On DD/MM/20YY you received confirmation Property 1 was destroyed by the natural disaster.

In MM/20YY you lived with family and friends until moving into Person B's parent's rental property located in City A at the end of MM/20YY.

Person A was experiencing health issues requiring hospitalisation.

On DD/MM/20YY your insurance claim was finalised.

On DD/MM/20YY, your child was born. Due to COVID-19 you isolated your family for a period.

In MM/20YY, your insurance company organised the clearing of everything on Property 1. You were unable to visit at this time due to COVID-19 restrictions.

In MM/20YY, Person A's parent was diagnosed with a terminal illness. You took care of the relative during this time.

On DD/MM/20YY, you purchased a property close to Property 1, located at XXX (Property 2). Settlement occurred on DD/MM/20YY.

The decision to purchase Property 2 was to enable work towards rebuilding Property 1 and enable you to obtain work locally.

Within 20YY, Person A's parent passed away with Person A required to administer the deceased's estate. Person A had surgery which included a period of recovery.

You remained in City A until MM/20YY.

You found a local builder taking on clients. You looked at employing them however, they subsequently had their building license cancelled in MM/20YY.

In MM/20YY, you moved into Property 2.

From MM/20YY to MM/20YY, Person B worked on Property 1 owing to the effects of the natural disaster, to meet related regulatory requirements for a planned rebuild of the property.

You modified your plans for Property 1

In MM/20YY, you contacted another building company. However, you did not engage this company owing to high costs and uncertainty with timeframes.

In MM/20YY, you were required to travel overseas to care for a relative.

In MM/20YY, you returned to discover Property 1 needed significant additional work to again meet the related regulatory requirements for a planned rebuild of the property.

You found obtaining work locally in your specialised field difficult.

Between MM and MM/20YY, Person A was ill.

You continued to contact local builders but were unsuccessful.

Between MM/20YY and MM/20YY, a close friend to Person A passed away, Person A's sibling needed caring for after surgery and Person A's grandparent passed away.

In MM/20YY, you obtained quotes and plan from a project-home builder. You did not pursue this builder due to higher-than-expected costs and the design not being ideal.

In MM/20YY, you continued to pursue other options and find builders without success.

In MM/20YY, you met a builder who agreed to rebuild Property 1. You obtained design plans for building and booked services to ready your building site.

In MM/20YY there was an on-site soil and septic meeting. The report to be submitted to the Council.

On DD/MM/20YY, the Council granted development consent.

On DD/MM/20YY, the Council granted the relevant construction certificate, the builder was engaged, and construction commenced.

On DD/MM/20YY and DD/MM/20YY services were connected and Council approved on-site sewage system.

On DD/MM/20YY, the Council inspection finds some minor issues to address.

On DD/MM20YY the builder completes these works.

On DD/MM/20YY, the Council inspects Property 1.

On DD/MM/20YY, the occupation certificate was issued. You moved in immediately and re-stablished Property 1 as your principal place of residence.

You have continued to live at Property 1 since that date as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-150

Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011

Reasons for decision

A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

The most common CGT event is CGT event A1 which happens under section 104-10 of the ITAA 1997 when an individual disposes of a CGT asset to another entity. If a CGT involves a contract, the time of the event is when the contract for the disposal is entered into, not when it is settled (subsection 100-20(3) of the ITAA 1997). If there is no contract, the time of the event is when the change of ownership occurs.

A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

Main residence exemption

Section 118-110 of the 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.

Generally, you can disregard a capital gain or capital loss made on the disposal of a dwelling that is your main residence if:

•         the dwelling was your home for the whole period you owned it (section 118-110 and 118-185 of the ITAA 1997)

•         the dwelling was not used to produce assessable income while you were living there (section 118-190 of the ITAA 1997), and

•         any land on which the dwelling is situated is not more than two hectares (subsection 118-120(3) of the ITAA 1997).

If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time except in limited circumstances when moving from one main residence to another (section 118-140 of the ITAA 1997).

The main residence exemption is extended by certain provisions.

Section 118-150 of the ITAA 1997extends the main residence exemption to allow you to treat land as your main residence for up to four years if you build, repair or renovate a dwelling on the land that subsequently becomes your main residence.

Section 118-150(4) of the ITAA 1997 provides that the exemption will apply for the shorter of the following periods:

a)            The 4 years before the dwelling became the taxpayer's main residence; or

b)            The period from when the taxpayer acquired the land until the dwelling became the taxpayer's main residence

Subsection 118-150(5) of the ITAA 1997 provides where land is acquired with a dwelling already on it, the 4-year period will only begin to run from the time the dwelling is vacated (e.g., by the owner or a tenant) for the purpose of repairing or rebuilding.

Subsection 118-150(6) of the ITAA 1997, provides once you make the choice, no other dwelling can be treated as your main residence during the period referred to in subsection (4), except if section 118-140 (about changing main residences) applies.

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.

Part 18 of the Tax Laws Amendment (2011 Measures No. 2) Bill 2011 amended section 118-150(4) of the ITAA 1997 to give the Commissioner a discretion to extend this period where a taxpayer does not build, repair or renovate a dwelling and establish it as their main residence within four years. The amendment received Royal Assent on 27 June 2011 and applies to CGT events that happen after that date.

The Commissioner would be expected to exercise the discretion in situations such as the following:

•         When the taxpayer is unable to build, repair or renovate the dwelling within this time period due to circumstances outside their control. For example, the relevant builder becomes bankrupt and is unable to complete the building, repairs or renovations.

•         When the taxpayer is unable to build, repair or renovate the dwelling due to unforeseen circumstances arising during this period. For example, the taxpayer or a family member has a severe illness or injury.

•         In circumstances when building, repairing or renovating the dwelling within the four years would impose a severe financial burden on the taxpayer. For example, the taxpayer would be required to incur an excessively high level of debt relative to their income. Consequently, the taxpayer may spend time accumulating sufficient savings (relative to their income) to build, repair or renovate a reasonable dwelling relative to their circumstances.

Application to your situation

Based on the facts provided; we consider there have been circumstances outside your control which prevented you from completing the building of your dwelling within the four-year period.

You tried to engage several builders throughout this process without success, before finding a suitable builder to accept the contract, and build the property as you intended.

There were unforeseen personal circumstances arising during the period impacting you and your relatives.

We are satisfied the dwelling became your main residence as soon as practicable after the work finished and the dwelling continued to be your main residence for at least three months.

It is considered appropriate for the Commissioner to exercise the discretion provided under subsection 118-150(4) of the ITAA 1997 in this situation. However, as the land was acquired with a dwelling already on it, the 4-year period will only begin to run from the time the dwelling is vacated (e.g., by the owner or a tenant) for the purpose of repairing or rebuilding it, which in your case is DD/MM/20YY.

If a choice is made to apply the concession, no other dwelling can be treated as your main residence in the period during which the concession applies.