Private ruling: CGT - main residence
Date of advice: 21 June 2023
Published: 14 August 2023
Ruling period: Year ended 30 June 20XX.
Date scheme commenced: 01 July 20XX.

Ruling: Q1: Can you claim the main residence capital gains tax exemption under section 118-110 of the Income Tax Assessment Act 1997 on the sale of vacant land? | A1: No.

Relevant facts and circumstances: You decided to move out of the capital city. You listed your main residence property which was located in the capital city for sale before COVID-19 was discovered. You sold and settlement occurred on your main residence property. On the date of settlement COVID-19 restrictions prevented you from moving. As your main residence property was sold you needed to rent a dwelling in the capital city. You sold your main residence property to fund the purchase of a vacant block of land where you intend to build your new main residence. Soon after you sold your main residence you purchased a vacant block of land in the countryside in a different state. Approximately four months after you purchased the vacant block of land you engaged the following to design and construct your home: • a local Architect to design a three-bedroom home; • a local Builder to build your home; and • a Draftsmen to finalise Architect's design and submit council documentation to build your new home. Due to COVID-19 restrictions and border closures you experienced some delays in the pre-building process. Approximately nine months after the builder was hired the contract with the builder was cancelled due to operational concerns. One year after the Architect was hired the development application (DA) was submitted to The Shire Council. A short time after the DA was submitted, the DA was refused. You lodged a Review of Determination with The Shire Council. Just over two years after you purchased the vacant block of land, you sold the vacant block of land. A week later you purchased another property to reside in. Your Review of Determination was completed, and your DA was approved. You withdrew your DA from The Shire Council due to sale of land. At no time have you concurrently owned two residential properties.

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 118-150

Reasons for decision: Summary: 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. A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time. However, 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. | Detailed Reasoning - In your circumstances: Before the discovery of Covid-19 you decided to sell your main residence, which was located in the capital city and move to the countryside. You purchased a vacant block of land with the intention to build a dwelling on it and treating it as your main residence. Your capital city main residence was sold during the Covid-19 lockdowns. This required you to rent accommodation in the capital city instead of moving to where you had purchased the vacant block of land. After the purchase of the vacant land some delays in the pre-building process were experienced due to Covid-19, such as lockdowns and border closures, and some delays were due to general building circumstances such as the development application refusal. Because of the delays you experienced with trying to construct your home, waiting for permission to build your home and the expenses associated with living in rental accommodation, you decided to purchase an existing residence and sell the vacant land. | Detailed Reasoning - Application to your circumstances: There's no reference in the capital gains tax legislation that gives the Commissioner any discretionary powers to disregard the capital gain or capital loss made on the sale of vacant land where the individual/s intend to build a dwelling as their main residence but fails to do so due to general delays in the building process and Covid related impacts. 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. 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.