Issue
Is the taxpayer entitled to the main residence exemption in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) for a property if the taxpayer's main residence is demolished and a new dwelling which becomes the taxpayer's main residence is subsequently constructed on the land within 4 years?
Decision
Yes. However, only a partial exemption will be available.
If the taxpayer makes a choice under section 118-150 of the ITAA 1997, the main residence exemption commences from the time the demolished dwelling was last occupied.
If the taxpayer does not make the choice under section 118-150 of the ITAA 1997 the main residence exemption will be available only from the time the new dwelling first becomes the taxpayer's main residence.
Facts
The taxpayer purchased a dwelling in 1998 and resided in that dwelling until 2001 when the dwelling was demolished. The taxpayer intends building a new dwelling on the land, which will become their main residence.
Reasons for Decision
The main residence exemption provisions are contained in Subdivision 118-B of the ITAA 1997. Generally, if a taxpayer builds a dwelling on land they already own, the land does not qualify for exemption under the main residence exemption provisions until the 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 for up to 4 years before the dwelling becomes their main residence, if they build a dwelling on land, or repair, renovate, or finish building a dwelling on the land. This applies if the taxpayer moves into the dwelling as soon as practicable after the building work is finished and continues to reside there for a minimum of 3 months (subsection 118-150(3) of the ITAA 1997).
If this choice is made, the taxpayer is able to extend the main residence exemption to cover a period prior to the time the dwelling actually became their main residence (subsection 118-150(2) of the ITAA 1997).
Where there is a dwelling on the land when the taxpayer acquires their ownership interest, and the taxpayer or someone else occupied it after that time, the 4 year period starts from the time when the dwelling ceased to be occupied. Note: No exemption is available from the start of the ownership period of the land to the time when the original dwelling was vacated, even though the original dwelling was the taxpayer's main residence throughout that time.