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Does the taxpayer qualify for a full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of a dwelling that was built to replace an original dwelling that was demolished or destroyed more than four years before the new dwelling became the taxpayer's main residence?

No. Only a partial main residence exemption is available.

If the taxpayer makes a choice under section 118-150 of the ITAA 1997, the main residence exemption can apply for up to four years before the new dwelling becomes their main residence.

If the taxpayer does not choose for section 118-150 of the ITAA 1997 to apply, an exemption will only be available from the time that the new dwelling becomes the taxpayer's main residence.

The taxpayer purchased a dwelling in 1992 and resided in that dwelling until 1997 when the dwelling was demolished.

The taxpayer constructed a new dwelling on the land and this became their main residence in June 2002 (as soon as practicable after the construction of the dwelling was completed).

The taxpayer rented other premises to live in from 1997 to 2002.

The taxpayer lived in the new dwelling for more than three months before it was sold.

Under the main residence exemption provisions contained in Subdivision 118-B of the ITAA 1997, any capital gain or loss that a taxpayer makes on the disposal of a dwelling that is their main residence is disregarded. The exemption also extends to land that is adjacent to the dwelling.

Generally, if a taxpayer demolishes an existing dwelling on land they already own and builds a new dwelling, no exemption is available until that new dwelling actually becomes the taxpayer's main residence.

However, section 118-150 of the ITAA 1997 allows a taxpayer to choose for the main residence exemption to apply to land while a new dwelling is being constructed for the shorter of four years or the period from when the original dwelling was last occupied: subsection 118-150(5) of the ITAA 1997.

The taxpayer can only make this choice if the new dwelling becomes their main residence as soon as practicable after the building work is finished and it continues to be their main residence for a minimum of three months: subsection 118-150(3) of the ITAA 1997.

If more than four years elapses between the time the taxpayer last occupied the original dwelling and when the new dwelling becomes their main residence the approach taken in ATOID 2003/232 is not relevant. An 'unbroken period of occupancy of the property as a main residence' as contemplated in that ATOID cannot be established.

If the taxpayer chooses for section 118-150 of the ITAA 1997 to apply, an exemption will be available from June 1998 (i.e., four years before June 2002 when the new dwelling became the taxpayer's main residence). No exemption is available from the start of the ownership period to the time when the original dwelling was vacated, even though the original dwelling was the taxpayer's main residence throughout that time.

If the taxpayer does not choose for section 118-150 of the ITAA 1997 to apply, an exemption will only be available from the time that the new dwelling becomes the taxpayer's main residence.