Edited version of private advice

Authorisation Number: 1052268971655

Date of advice: 3 July 2024

Ruling

Subject: CGT - vacant land

Question

Wil a capital gains tax event occur for you on the sale of your vacant land?

Answer

Yes.

You cannot disregard the capital gain or capital loss made on the sale of 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 the reason for not being able to construct a dwelling.

Pursuant to subsection 109-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gains tax (CGT) event A1 will occur for you when you enter into a contract of sale of your vacant land. You cannot disregard any capital gain or loss on the disposal of the property.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX XX 20XX, you signed a building contract a builder (the Builder).

On XX XX 20XX, you entered into a contract of sale to purchase vacant land (the Land), with the intention to build a family home.

On XX XX 20XX, you paid a deposit of the original purchase price.

On XX XX 20XX, the land settlement was finalised.

On XX XX 20XX, the Builder advised that the Development Approval (DA) had been granted.

On XX XX 20XX, you were notified that the Builder held ownership of the Land.

On XX XX 20XX, the Builder advised you of a variation to the construction quote, to build a dwelling on the Land.

On XX XX 20XX, the Builder advised they would commence obtaining the construction certificate (CC), the Builder also advised of a second variation to the construction quote.

On XX XX 20XX, the CC application number was obtained.

The Builder completed minor works on the Land, including a land survey and home design plan.

You wish to terminate the building contract for the following reasons:

•         The Builder failed to acquire Home Building Insurance when they accepted your deposit.

•         The Builder did not complete due diligence and obtain a CC in a timely fashion.

•         The Builder has altered construction quotes on numerous occasions.

In XX 20XX, you were expecting a child and did not want to spend more time on the home build.

On XX XX 20XX, you terminated the building contract with the Builder.

On XX XX 20XX, your lawyer sent a letter to the Builder with instructions that you wanted to terminate the build contract and you sought a refund of your deposit.

On XX XX 20XX, your lawyer sent a second letter to the Builder with instructions that you were seeking a refund of your deposit for the build, plus damages.

On XX XX 20XX, you lodged a complaint with the Building Commission.

On XX XX 20XX, the Building Commission responded to your complaint, explaining that they were unable to intervene in complaints where the disputes are contractual in nature.

No dwelling has been constructed on the Land.

The Land is on the market to be sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 109-5

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

Pursuant to 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 situation is not more than two hectares.

Section 118-135 of the ITAA 1997 provides that "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 a 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).

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.

Capital gains tax

A capital gain or capital loss may arise if a CGT event happens to a capital gains tax asset. The most common CGT event is CGT event A1, and this occurs when an entity disposes of their ownership interest in an asset. The sale of vacant land would be considered to be a CGT event A1.

Section 104-10 of the ITAA 1997 explains that you dispose of a CGT asset when your ownership interest changes from you to another entity. Subsection 104-10(3) confirms that the time of the event is:

(a)  When you enter into the contract for the disposal; or

(b)  If there is no contract - when the change of ownership occurs.

The main residence exemption to disregard any capital gain or capital loss on the disposal of a CGT asset, can only be applied to land owned by a taxpayer if the taxpayer sells the land as part of the sale of a dwelling. That can include situations where a taxpayer builds a dwelling on the land or repairs, renovates or finishes building a dwelling on the land and then moves into the completed dwelling.

The only time that the main residence exemption applies to the sale of vacant land is where it is sold after the accidental destruction of the main residence that was situated on it. There are no other provisions that provide an exemption for a capital gain or capital loss due to the sale of vacant land.

Application to your circumstances

In your case, you purchased vacant land, however construction of a dwelling never commenced. The vacant land you own is a CGT asset and a CGT event A1 will happen when you dispose of it.

Regardless of the intentions that you held when you bought the block of land, you are not selling a dwelling with the land, nor are you selling a vacant block of land on which an existing dwelling was destroyed. As you do not meet any of the necessary conditions to be eligible for any of the exemptions on the disposal of land, you will not be able to disregard any capital gain made on the disposal of the vacant land.

Therefore, CGT event A1 will occur when you enter into a contract of sale to dispose of the vacant land, pursuant to subsection 109-5(2) of the ITAA 1997. 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.