Issue
Is a capital gain or capital loss from a CGT event that happens to a block of land, just after the intentional demolition of a dwelling which was the owner's main residence, disregarded under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. A capital gain or capital loss made from a CGT event that happens to a block of land just after the intentional demolition of a dwelling which was the owner's main residence is not disregarded under Subdivision 118-B of the ITAA 1997.
Facts
The taxpayer acquired a property (consisting of a house and land) after September 1985 and lived in the house as their main residence until just before it was intentionally demolished. At that time the taxpayer moved into rental accommodation.
Just after the house was demolished the taxpayer, whilst still living in the rental accommodation, disposed of the vacant block of land and made a capital gain. The taxpayer did not claim the main residence exemption for any other property during the time they owned the property. No part of the property was used for income producing purposes during the ownership period.
Reasons for Decision
A capital gain or capital loss an individual makes from a CGT event that happens to a dwelling is disregarded under section 118-110 of the ITAA 1997 if the dwelling was the taxpayer's main residence throughout the period it was owned.
The main residence exemption can apply to up to 2 hectares of land adjacent to a dwelling if the land was used primarily for private or domestic purposes in association with the dwelling: section 118-120 of the ITAA 1997.
However section 118-165 provides that the main residence exemption does not apply to a CGT event that happens in relation to land, to which the exemption can extend under section 118-120 if that CGT event does not also happen to the dwelling.
CGT event A1 happened when the block of land was sold, but this CGT event did not happen to the dwelling. CGT event C1 (about loss or destruction) had already happened to the dwelling when it was demolished. Therefore, section 118-165 applies to deny the taxpayer a main residence exemption on the capital gain made on the disposal of the land. Note: there is an exception to section 118-165 of the ITAA 1997 in section 118-160 of the ITAA 1997 which applies where a dwelling is accidentally destroyed.