Issue
Is the taxpayer entitled to a full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of a dwelling built to replace their previous main residence that was demolished if the previous residence was not their main residence for the whole time they owned it?
Decision
No. The taxpayer is only entitled to a partial main residence exemption.
If the taxpayer makes a valid choice under section 118-150 of the ITAA 1997, the main residence exemption will apply from the last time the original dwelling became the taxpayer's main residence until the sale of the new dwelling.
Facts
The taxpayer purchased a dwelling in February 1987 which they rented out until December 1994.
The taxpayer commenced to reside in the dwelling in December 1994. It was their main residence from that date until January 1999.
The taxpayer again rented out the dwelling from January 1999 until January 2001. The taxpayer was not entitled to treat the dwelling as their main residence during this period because they treated another dwelling as their main residence.
The dwelling again became the taxpayer's main residence in January 2001. It continued to be their main residence until they demolished it in January 2002.
A new dwelling was constructed which became the taxpayer's main residence in November 2002 (as soon as practicable after completion).
The taxpayer continued to live in the new dwelling until it was sold in March 2003.
Reasons for Decision
The main residence exemption provisions in Subdivision 118-B of the ITAA 1997 disregard any capital gain or capital loss that a taxpayer makes on the disposal of a dwelling that is their main residence. The exemption also extends to 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 the main residence exemption 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 while a new dwelling is being constructed. Where an original dwelling on the land is demolished or destroyed and a new dwelling is constructed, the exemption is for the shorter of four years before the new dwelling becomes their main residence or the period from when the original dwelling ceased to be occupied (subsections 118-150(4) and 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 at least three months (subsection 118-150(3) of the ITAA 1997).
The main residence usage of an original dwelling which is demolished or destroyed, will not normally count towards an exemption for the new dwelling and land.
However, as stated in ATO ID 2003/232, the two dwellings may be treated as one and the main residence usage of the original dwelling will count towards the main residence exemption for the new dwelling and land if: • the taxpayer makes a valid choice under section 118-150 of the ITAA 1997 to treat the land on which the new dwelling is constructed as their main residence from the time they last occupied the demolished dwelling; and • the other requirements for the main residence exemption in Subdivision 118-B of the ITAA 1997 are met.
The effect of making a choice under section 118-150 of the ITAA 1997 in this case will be that there is an unbroken period of main residence occupancy on the land from the last time the original dwelling became the taxpayer's main residence in January 2001 until the new dwelling was sold in March 2003. Therefore, the main residence exemption is available for this period.
No exemption is available from December 1994 to January 1999 even though the original dwelling was the taxpayer's main residence during this period. The facts of this case can be distinguished from those in ATO ID 2003/232. The original dwelling in ATO ID 2003/232 was the taxpayer's main residence for their entire ownership period and, as a result, the taxpayer was entitled to a full main residence exemption. In this case, the original dwelling was not the taxpayer's main residence for their entire ownership period. The unbroken main residence occupancy period can only be established from January 2001 until March 2003.
Accordingly, the taxpayer is only entitled to a partial main residence exemption.