Issue
Can a taxpayer qualify for a full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) for a property if a dwelling that was always the taxpayer's main residence was demolished or destroyed and a new dwelling is built on the land within four years of the time that the first dwelling was last occupied?
Decision
Yes. A taxpayer will qualify for a full main residence exemption for a dwelling that was built to replace a main residence that was demolished or destroyed provided that: • the taxpayer makes a valid choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling was constructed as their main residence from the time that the demolished or destroyed dwelling was last occupied by the taxpayer, and • the other requirements for a full main residence exemption in Subdivision 118-B of the ITAA 1997 are met.
It does not matter whether the demolition or destruction of the first dwelling was voluntary or involuntary.
Facts
The taxpayer purchased a dwelling in 1998 and resided in that dwelling until December 2001 when the dwelling was demolished.
The taxpayer built a new dwelling on the land and it became their main residence in June 2002 (as soon as practicable after the construction of the dwelling was completed).
The taxpayer rented a home from December 2001 to June 2002.
The taxpayer lived in the new dwelling until January 2003 when it was sold.
Reasons for Decision
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 certain land that is adjacent to the dwelling.
Generally, if a taxpayer builds a dwelling on land they already own, the land does not start to 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 to land for up to four years before the dwelling becomes their main residence. The taxpayer can only make this choice if the dwelling becomes the taxpayer's 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).
Ordinarily where a dwelling is demolished or destroyed and a new dwelling is constructed, the main residence usage of the first dwelling would not count towards an exemption for the new dwelling and land.
However if the taxpayer: • builds a dwelling to replace a demolished or destroyed main residence; and • makes a choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling is constructed as the taxpayer's main residence from the time that the demolished or destroyed dwelling was last occupied by the taxpayer, and • there is not more than four years between the time the demolished or destroyed dwelling was last occupied and the time the new dwelling became the taxpayer's main residence
the two dwellings may be treated as one and the main residence usage of the former will count towards the main residence exemption for the new dwelling and land.
The effect of making a choice under section 118-150 of the ITAA 1997 in these circumstances will be that there is an unbroken period of occupancy of a main residence on the land from the time when the first dwelling became the taxpayer's main residence until the new dwelling ceases to be their main residence. The main residence exemption can apply to the adjacent land for all of this period.
Amendment History
Date of amendment Part Comment
Date of amendment | Part | Comment