Private ruling: Capital gains tax - disposal of vacant land and intended main residence
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the capital gain made upon the disposal of vacant land on which you intended to construct your main residence disregarded? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your spouse resided at property A as your main residence. Your spouse operates their business from property A. You and your spouse purchased a vacant block of land property B for the sum of $X. You and your spouse intended to construct your new dwelling at property B. In late 2009 you and your spouse disposed of property A to a property developer with settlement to occur in 2010. Settlement on property B was to occur in 2010. A condition of the disposal of property A was that you and your spouse could continue to reside there for a specified period which would see your new dwelling ready for you and your family to move into before the 2010 deadline. You and your spouse entered into a contract with a builder to construct your new dwelling at property B with an approximate specified construction timeframe. You and your spouse paid an amount to the builder on the signing of the building contract. The total cost of construction of the dwelling was around $X your spouse's business built into the dwelling. In early 2010 you were advised by the builder that there would be a delay in the commencement of the construction of your dwelling due to release of land being delayed for one or two months. Month by month you and your spouse were advised by the property B's real estate sales office that settlement on property B was delayed by a month. In late 2010 settlement finally occurred on property B. You and your spouse had to be out of property A by late 2010 and the construction on your new dwelling at property B had not commenced. You and your spouse only had a month to find a new dwelling, your oldest child was commencing school in 2011 and they were enrolled in the local primary school near property B. It was virtually impossible to find a rental property close to where your new dwelling was being built which would accommodate your spouse's business. The ceasing of your spouse's business would affect your family's income. If it were possible for you and your spouse to stay at property A it would have involved in excess of three hours of commuting to drop off and pick up your child from school a day. With the situation you and your spouse faced, of a long delay in the land release at property B, the only suitable option was to buy an established home and give up your plan to build your dwelling at property B. You and your spouse could not risk affecting your child's first year of schooling and affecting their development by introducing further instability. You and your spouse cancelled your building contract with your builder which resulted in you and your spouse paying them an amount of approximately $X. You and your spouse purchased an established home (property C). The layout of the home at property C is identical to the one you and your spouse intended to build at property B. It cost you and your spouse $X extra than building this dwelling at property B. You and your spouse also paid additional costs, being a total of $X above what the construction of the same dwelling would have cost at property B. In early 2011 you and your spouse disposed of property B for $X with real estate costs of $X. You and your spouse have recouped an amount of the unexpected $X extra outlaid for property C. You and your spouse's tax agent advised that $X received from the disposal of property B is subject to capital gains tax (CGT).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Main residence exemption: Generally, you can disregard any capital gain or capital loss you make when you dispose of your main residence as long as it is your main residence throughout your ownership period. The main residence exemption may be extended to a vacant block of land for a period of four years provided that a dwelling is 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. Vacant land on which no dwelling has been constructed can never satisfy the exemption as there has never been a dwelling on the land. The mere intention to construct a dwelling or to occupy a dwelling as a sole or principle residence, but without actually doing so is insufficient to obtain the exemption. You and your spouse are not entitled to the main residence exemption as a dwelling was never constructed at property B. While we appreciate that you and your spouse fully intended to build your main residence at property B, a dwelling was not constructed on the vacant land. The Commissioner has no discretion to disregard any capital gain you and your spouse made upon its disposal. | Detailed Reasoning - Cost base: The cost base of a CGT asset is made up of five elements: · money or property given for the asset · incidental costs of acquiring the CGT asset or that relate to the CGT event, such as cost of transfer, stamp duty and costs of advertising or marketing · costs of owning the asset, such as rates, land taxes and non-deductible interest on borrowings · capital costs to increase or preserve the value of your asset or to install or move it, and · capital costs of preserving or defending your ownership of or rights to your asset. Only the costs that you and your spouse incurred in relation to property B can be included in the cost base. You are eligible to use the discount method to calculate your capital gains as you are: · an individual · a CGT event happened to an asset you owned · the CGT event happened after 21 September 1999, and · you acquired the asset at least 12 months before the CGT event. For more information on the cost base and how to calculate your capital gain please see the enclose information which has been taken from the Guide to capital gains tax 2011 (NAT 4151-6.2011).

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.