Issue
Can section 118-160 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to exempt a sale of vacant land when a dwelling that you choose to treat as your main residence under section 118-145 of the ITAA 1997 is accidentally destroyed?
Decision
Yes. Section 118-160 of the ITAA 1997 (which allows you to claim the main residence exemption when vacant land is sold 'after a dwelling that is your main residence is accidentally destroyed') can apply if the dwelling was your main residence because of a choice you have made under section 118-145 of the ITAA 1997.
Facts
An individual acquires land and a dwelling after 19 September 1985
The dwelling is used as the individual's main residence until May 1996, when they move out.
The dwelling is then used as a rental property.
The dwelling is destroyed in a flood in August 2001.
The individual elects to continue to treat the dwelling as their main residence under section 118-145 of the ITAA 1997.
The vacant land is sold in February 2003.
Reasons for Decision
The main residence exemption in Subdivision 118-B of the ITAA 1997 applies to a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence (subsection 118-110(1) of the ITAA 1997).
The exemption extends to any capital gain or loss from land adjacent to a dwelling (to a maximum area of two hectares including the land immediately under the dwelling) if the land is used primarily for private or domestic purposes in association with the dwelling (section 118-120 of the ITAA 1997). However the exemption does not apply to land if separate CGT events happen to the land and the dwelling other than through a compulsory acquisition under section 118-245 of the ITAA 1997 (section 118-165 of the ITAA 1997).
The main residence exemption can be chosen for a CGT event that happens to vacant land where the CGT event happens to the vacant land after a dwelling that is your main residence is accidentally destroyed (section 118-160 of the ITAA 1997).
The requirement in subsection 118-160(1) of the ITAA 1997, that a dwelling that is your main residence is accidentally destroyed, can be satisfied where the dwelling that is destroyed is taken to be your main residence because you have made a choice under section 118-145 of the ITAA 1997.
Section 118-145 of the ITAA 1997 enables you to choose to continue to treat a dwelling as your main residence after it ceases to be so. If the dwelling is used for income producing purposes the choice has effect for six years. Each time the dwelling again becomes a main residence and then ceases to be so a new choice can be made.
Here a choice can be made under section 118-145 of the ITAA 1997 to treat the destroyed dwelling as the individual's main residence at the time it was destroyed because, at that time, it had been used for less than six years for income producing purposes.
Having made the choice under section 118-145 of the ITAA 1997 another choice can be made under section 118-160 of the ITAA 1997 to exempt any capital gain or loss arising from the sale of the vacant land.
Amendment History
Date of amendment Part Comment 26 February 2016 Reasons for Decision Amended for clarity and to reflect changes in the relevant legislation. Legislative references Included reference to Subdivision 118-B and section 118-245 of the ITAA 1997.
Date of amendment | Part | Comment
26 February 2016 | Reasons for Decision | Amended for clarity and to reflect changes in the relevant legislation.
Legislative references | Included reference to Subdivision 118-B and section 118-245 of the ITAA 1997.