Private ruling: Capital gains tax
Date of advice: 6 December 2024
Published: 28 January 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Have the requirements of section 118-160 of the Income Tax Assessment Act 1997 (ITAA 1997) been met such that you can apply Subdivision 118-B of the ITAA 1997 to the land, as if from the time of the destruction until you disposed of it, the dwelling had not been destroyed and was your main residence? | A1: Yes.

Relevant facts and circumstances: You purchased the property more than a decade ago. You immediately commenced residing in the property and made it your main residence from the date of purchase. You continued to reside in the property until XX/XX/20XX when you relocated your place of employment and the property was rented out. During the period the property was rented out you owned no other main residence. The rental arrangement ceased on XX/XX/20XX when the last tenant departed. At this time you inspected the property and identified some damage to the property. On XX/XX/20XX you lodged an insurance claim. Further inquiries were made as to the cause of the damage. You moved back into the property. You continued to communicate with your insurer regarding your insurance claim. Further extensive underlying damage to the property was discovered. On XX/XX/20XX, your insurer advised you that the house was deemed not habitable in accordance with the definition in your policy of insurance. They advised you should vacate the property. Your insurer arranged temporary accommodation for you on XX/XX/20XX at which time you vacated the property. You purchased another property on XX/XX/20XX and moved in once the sale was settled. You continue to reside at that property. You did not elect to immediately treat that property as your main residence for capital gains tax (CGT) purposes. Rather, you elected to continue to treat your original property as your main residence for CGT purposes until its disposal in XX/20XX. On XX/XX/20XX, your insurer advised that based on recent reports from an engineering firm and their own internal Building Coordinator regarding the damage to the building and the ongoing building issues, they had determined that the building should be demolished. You reached a settlement with your insurer in relation to your insurance claim on XX/XX/20XX. Included in the settlement sum was an amount for the cost of demolition. The building was demolished in XX/20XX and the vacant land was sold in XX/20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-160 | Income Tax Assessment Act 1997 section 118-145 Further issues for you to consider | We have limited our private ruling to the question raised in your application. There is a related issue that you should consider, being whether the 6 year absence rule limit was exceeded during your first period of absence from the property, such that you are only entitled to a partial, rather than a full, exemption under Subdivision 118-B of the ITAA 1997 in relation to the disposal of the property.

Reasons for decision: Summary: Section 118-160 of the ITAA 1997 provides that if a dwelling that is your main residence, is accidentally destroyed (for example, in a natural disaster) and the land is disposed of without another dwelling being built on it, then you can apply the main residence exemption provisions in Subdivision 118-B of the ITAA 1997 to the land, as if from the time of the destruction until you disposed of it, the dwelling had not been destroyed and was your main residence. At the time the dwelling was destroyed, the property in question was being treated as your main residence for CGT purposes under the absence rule provided by section 118-145 of the ITAA 1997. The remaining requirement that must be met for section 118-160 of the ITAA 1997 to apply is that the dwelling was 'accidentally' destroyed. The dictionary definition of 'accident' is 'an unfortunate incident that happens unexpectedly and unintentionally, typically resulting in damage or injury.' It is noted that the building was demolished. However, your case can be contrasted with the situation where a property owner makes a voluntary choice to demolish a dwelling, for example, in order to redevelop the property. In your case, your insurer had determined that the dwelling was damaged to the extent that it was uninhabitable and beyond repair such that it should be demolished. Also, the damage to the dwelling was not normal deterioration due to the passage of time. Rather, it was due to unexpected and unintentional events which you made claim for under your insurance policy and for which your insurer paid you a settlement sum. Your situation is similar to that where a dwelling is damaged beyond repair in a natural disaster and the remaining structure is demolished. As in that situation, the demolition in your case is not considered to be a voluntary choice. Rather, the destruction of your dwelling was involuntary and resulted from unexpected and unintentional events. Consequently, we accept that your dwelling was accidentally destroyed and therefore the requirements of section 118-160 of the ITAA 1936 have been met.