Issue
Will the taxpayer be 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 property where the taxpayer never lived in the original dwelling, but continuously occupied as their main residence, a new dwelling subsequently built on the land?
Decision
No. The taxpayer will not be entitled to a full main residence exemption under Subdivision 118-B of the ITAA 1997 as under section 118-150 of the ITAA 1997, the taxpayer can only choose to apply the main residence exemption from when the original dwelling ceased to be occupied by someone else and not when the taxpayer acquired an ownership interest in the land.
Facts
The taxpayer acquired a property with an existing building in late 1988. The previous owner continued to live in this building until March 1989. The taxpayer did not move into the existing building.
The taxpayer demolished the original building soon after the previous owner vacated it and constructed a new building on the land, which was completed in late 1989. The new building became the taxpayer's main residence as soon as practicable after construction was completed. From January 1989, when the taxpayer sold his existing dwelling, until the new dwelling was completed, the taxpayer occupied rented premises and had no other main residence.
The taxpayer lived in the new dwelling for more than three months and intends to sell the property in the near future.
Reasons for Decision
Generally, where a taxpayer builds a dwelling on land they already own, the land does not begin to qualify for the main residence exemption, under Subdivision 118-B of the ITAA 1997, until the dwelling actually becomes the taxpayer's main residence.
Subsection 118-150(4) of the ITAA 1997 can operate to allow the taxpayer to choose to treat the land as if it was their main residence, where the taxpayer acquired the land, but before moving in, it is necessary to construct, repair, renovate or finish building a dwelling on the land. The taxpayer can only choose this longer period of exemption if the dwelling becomes their main residence as soon as practicable after the work is finished and it remains their main residence for at least three months.
In a case where there was already a dwelling on the land when the taxpayer acquired their ownership interest, but after that time, either the taxpayer or someone else occupied the dwelling, the time during which the main residence election can be chosen is reduced, so that the period when the exemption starts begins when the dwelling ceased to be occupied, and not from when the taxpayer acquired their ownership interest.
In this case, the taxpayer did not have another main residence during the period from when the original dwelling ceased to be occupied (March 1989) to the date the taxpayer moved into the new dwelling as their main residence (late 1989). Therefore, the taxpayer can choose to apply the main residence exemption under section 118-150 of the ITAA 1997 for this period. The choice can be made as the new dwelling became the taxpayer's main residence as soon as practicable after the work was completed, and it continued to be the taxpayer's main residence for more than three months.
Therefore, for the taxpayer, the main residence exemption period does not start when they acquired their ownership interest in the property, but from when the original dwelling ceased to be occupied and would end when the property ceased to be their main residence.