Private ruling: Income tax - Capital gains tax - demolition of main residence
Date of advice: 18 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will you make a capital gain or loss on the sale of the block that formally contained your main residence? | A1: Yes

Relevant facts and circumstances: You and your former spouse purchased vacant land. During the 20XX financial year, your parent built a dwelling on the vacant land. The dwelling was completed in 20YY and around the same time you separated from your spouse. You moved into the completed dwelling towards the end of 20YY and used this as your main residence. About nine months later, you received a demolition order from the local council as the dwelling was not built in accordance with the Building Code of Australia 20XX. Subsequently, you demolished the dwelling. In 20ZZ you sold the vacant land.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-150 | Income Tax Assessment Act 1997 Section 118-160

Reasons for decision: Summary: A capital gain or capital loss an individual makes from a CGT event that happens to a dwelling is disregarded under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) if the dwelling was the individuals main residence for the entire period you owned it. Where you demolish a dwelling and do not build a replacement dwelling on the land but instead sell the property as vacant land, the main residence exemption is lost as the exemption attaches to the dwelling and not the land. Therefore, you are not entitled to the main residence exemption upon the sale of your property as no dwelling will exist at the time of disposal of the land. | Detailed Reasoning - Further information for you to consider: A capital gain or loss is the difference between what it cost you to own an asset (cost base) and what you received when you disposed of it. You will need to calculate your cost base in order to work out if you have made a capital gain or loss. Section 110-25 of the ITAA 1997 sets out the five elements that make up the cost base of an asset for CGT purposes. These elements are: • first element: money or property given for the asset • second element: incidental costs of acquiring the CGT asset or of the CGT event (such as agent's commission, stamp duty and legal costs and fees) • third element: costs of owning the asset • such as interest on money borrowed to buy the asset, the costs of maintaining and insuring it, rates or land tax, interest on money you borrowed to refinance the money you borrowed to acquire it and interest on money you borrowed to finance capital expenditure you incurred to increase its value. • These costs can only be included in the cost base of assets acquired after 20 August 1991. • This element does not apply to a personal use asset or a collectable • fourth element: capital expenditure incurred to increase or preserve the value of your asset or to install or move it, and • fifth element: capital expenditure incurred in establishing, preserving or defending your ownership of or rights to your asset. Please note that this only applies once a person has acquired the asset. Therefore, in your case, all the costs associated with construction and demolition of the dwelling may be included in your cost base.