RW Dunne SM

Administrative Appeals Tribunal, Adelaide


Decision date: 22 January 2009

RW Dunne


1. This is an application to review a decision of the Commissioner of Taxation ("respondent") to disallow an objection to a private binding ruling. The applicants (Adam Couch and Tanya Couch) had acquired a residence in June 2000 with the intention of residing in it as their matrimonial home. In December 2006, they sold the residence without having resided in it. The respondent ruled that the capital gain derived by the applicants on the

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disposal of the residence was subject to capital gains tax and they were not entitled to the main residence exemption. The applicants objected against the ruling and the respondent decided to disallow the objection. The applicants have applied to this Tribunal for review of the objection decision.

2. At the hearing, the applicants represented themselves and Ms Sandra Loveband (from ATO Legal Services Branch) appeared for the respondent. The T documents were admitted into evidence (as Exhibit R1) pursuant to s 37 of the Administrative Appeals Tribunal Act 1975.

Issue for the Tribunal

3. The issue for the Tribunal is whether the capital gain made by the applicants on the disposal of the residence, situated at Unit 5, 10-11 Hopelands Court, Wynn Vale, should be disregarded pursuant to s 118-110 of the Income Tax Assessment Act 1997 ("ITAA 1997") because the residence was considered to be their main residence for the entire ownership period.


4. The provisions of the ITAA 1997 that are presently relevant are ss 104-10, 118-110 and 118-135. They read as follows:

  • "104-10 Disposal of a CGT asset: CGT event A1
    • (1) CGT event A1 happens if you *dispose of a *CGT asset.
    • (2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
      • (a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
      • (b) merely because of a change of trustee.
    • (3) The time of the event is:
      • (a) when you enter into the contract for the *disposal; or
      • (b) if there is no contract-when the change of ownership occurs.

        Example: In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.

      The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).


  • 118-110 Basic case
    • (1) A *capital gain or *capital loss you make from a *CGT event that happens in relation to a *CGT asset that is a *dwelling or your *ownership interest in it is disregarded if:
      • (a) you are an individual; and
      • (b) the dwelling was your main residence throughout your *ownership period; and
      • (c) the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.

      Note 1: You may make a capital gain or capital loss even though you comply with this section if the dwelling was used for the purpose of producing assessable income: see section 118-190.

      Note 2: There is a separate rule for beneficiaries and trustees of deceased estates: see section 118-195.


  • 118-135 Moving into a dwelling

    If a *dwelling becomes your main residence by the time it was first practicable for you to move into it after you *acquired your *ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence."

Material facts

5. As there was no dispute regarding the material facts, the Tribunal takes them from the respondent's notice of private ruling (Exhibit R1, T8 at pages 28-29):

"...You were employed with the Australian Defence Force.

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You and your spouse resided in accommodation provided by your employer.

You did not, initially, purchase a property to reside in as you were frequently transferred to different localities in Australia and overseas.

You purchased a unit at 5/10-11 Hopelands Court, Wynn Vale, SA on 16 June 2000 for $127,000.00 with the intention of this property being your main residence once your had secured stable employment in the area.

You continued to reside in Australian Defence Force accommodation.

You also purchased an investment property on 26 September 2002 at 4/4 Avalon Drive, Wynn Vale SA for $185,950.00.

You were posted to Adelaide in January of 2006 by the Australian Defence Force.

You continued to reside in Australian Defence Force accommodation, until you moved in with the parents of Adam Couch, as both of your properties were still under tenancy leases and your accommodation agreement with the Australian Defence Force had expired.

You purchased a new home at 33 Gertrude Street, Glandore, SA for $500,000.00 and you have resided in this property since 22 December 2006.

The other properties at 5/10-11 Hopelands Court, Wynn Vale, SA and 4/4 Avalon Drive, Wynn Vale, SA also settled on 22 December 2006. The proceeds from sale were used towards paying off the previous debt in acquisition of other properties and towards the purchase of the property in which you now reside.

You or your spouse have never resided in either of the units.


Applicants' evidence

6. The applicants' evidence was that, at the time of their marriage , Mr Couch was employed by the Australian Defence Force. He was posted to Sydney and they resided in accommodation provided by Defence. Between January 1995 and January 2006, he was posted to various locations in Australia, Papua New Guinea and East Timor. On each occasion, the applicants resided in accommodation provided by Defence. The property known as Unit 5, 10-11 Hopelands Court, Wynn Vale ("Unit") was purchased in June 2000 with the intention that it would be their permanent residence once Mr Couch was posted back to Adelaide. In September 2002, the applicants purchased the property at Avalon Drive as an investment.

7. The purchase of the Unit whilst Mr Couch was employed with Defence was necessary for a number of reasons. To delay the purchase when he was no longer employed by Defence would have meant loan repayments that could not be serviced, higher housing costs and the borrowing of increased funds to be repaid over a shorter period, prior to retirement. In January 2006, when Mr Couch was posted back to Adelaide, accommodation was provided for a limited period by Defence. When this arrangement ended, the applicants were unable to reside in either the Unit or the property at Avalon Drive because both were subject to current third party leases. In February/March 2006, the applicants were able to live in the residence of Mr Couch's parents. However, after six months, this ended when the parents returned from interstate. It was not possible then for the applicants to move into the Unit because it was still subject to a current lease. Having returned to Adelaide, it became apparent to the applicants that the Unit would not be an ideal environment in which to start and raise a family. Had they been able to occupy the Unit, they would have placed it on the market for sale. The Unit and the Avalon Drive property were both owned by the applicants as joint tenants. During the entire period of ownership, both properties were leased out. Tax deductions for interest on borrowed funds and other expenses were claimed and the applicants were each entitled to a half share of the tax losses. In January 2007, Mr Couch resigned from Defence and commenced employment with the Department of Energy and Infrastructure.

8. In cross-examination, Mr Couch said that, in November 2005, the applicants knew that they would be moving back to Adelaide. However, it was a last minute decision. At the time, they arranged for an extension of the lease of the Unit from 3 February 2006 to 2 February

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2007. When the Unit was sold in December 2006, the sale was made subject to the lease that was to expire on 2 February 2007. The decision to extend the lease period of the Unit was made before the applicants knew they were to be posted back to Adelaide.


9. The applicants submitted that, when they purchased the Unit in June 2000, they had every intention to occupy it as their matrimonial home. Since then, as they had been unable to obtain a transfer, they had had no prior opportunity to do so. In November 2005, they decided to return to Adelaide and Mr Couch would leave Defence. He could obtain a part-time position or could rejoin Defence for a two year posting. On this basis, a decision was made to re-lease the Unit for a further 12 months. As it was always the applicants' intention to occupy the Unit as their matrimonial home, but employment circumstances prevented them from doing so, they should be entitled to the main residence exemption.

10. For the respondent, Ms Loveband submitted that the Unit could not be treated as the applicants' main residence throughout the period of its ownership. The applicants did not reside in the Unit at any stage. Both the Unit and the Avalon Drive property had been rented out and tenants had been in occupation at all relevant times. Rent was received from both units and tax losses were claimed by the applicants. Their intention was to rent out both premises, not to occupy either of them as their matrimonial home. As the applicants did not reside in the Unit at any stage, the main residence exemption was not available to them.


Can the Commissioner disregard any capital gain arising on the sale of the property situated at Unit 5, 10-11 Hopelands Court, Wynn Vale?

11. A capital gain can only arise if a capital gains tax ("CGT") event happens. A CGT event happens if a taxpayer disposes of a CGT asset. A CGT event happened when the applicants disposed of the Unit, and a capital gain was made on the disposal of the dwelling (s 118-110, ITAA 1997). A taxpayer may make a capital gain which is taxable, even though s 118-110 is complied with, if the dwelling was used for the purpose of producing assessable income (s 118-190, ITAA 1997). The main residence exemption in s 118-110 may, in certain circumstances, be extended to take account of the time needed to move into a dwelling. It includes the period from when the taxpayer acquired the dwelling (as a main residence) to when it was first practicable to move into the dwelling after it was acquired (s 118-135, ITAA 1997).

12. In the present case, the applicants' evidence was that the Unit was acquired by them as their matrimonial home. It was their contention that it only became practicable for them to reside in the Unit when they returned to Adelaide in January 2006. Because of Mr Couch's postings, there had been no prior opportunity for them to live there. At the last minute, they decided to return, but the Unit was still subject to a lease. They subsequently decided that the Unit would not be suitable as a family home and proceeded to make arrangements to dispose of it. In the Tribunal's opinion, the applicants did not move into the Unit by the time it was first practicable to do so after it was acquired. The evidence shows that the applicants acquired the Unit and were legally entitled to move into it immediately after settlement on 16 June 2000. Instead, they chose to lease the property out. The Tribunal finds, on the applicants' evidence, that while they had an intention to move into the Unit at some time, they only moved into it when it became convenient for them to do so. As was said by Senior Member A Sweidan in
Re Chapman and Commissioner of Taxation 2008 ATC 10-029; [2008] AATA 421 at paragraph 29:

"In the Tribunal's view the words 'the time it was first practicable' should not be read down to mean 'the time it was first convenient'."

13. In considering the operation of s 118-135, the Tribunal is able to gain assistance from Chapter 2.12 of the Explanatory Memorandum to the Bill that became Tax Law Improvement Act (No 1) 1998. It reads:

"The rewritten provision takes account of situations where, for example, there is a delay in moving because of illness or other reasonable cause.

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The exemption does not extend to cases where an individual is unable to move into the dwelling because it is being rented out. However, it would cover the period after the end of the tenancy if the owner could not take up residence immediately because of the nature of repairs required to the dwelling."

The applicants contended that, as the Unit was not being "rented out" but was the subject of a lease, the Explanatory Memorandum did not apply. As the Tribunal explained to the applicants at the hearing, the expression "rented out" is commonly used and would include the situation where a property was the subject of a formal lease.

14. The applicants also contended that there were reasons beyond their control that prevented them from moving into the Unit. In the Tribunal's opinion, the fact that the Unit was continually being leased and was not able to be occupied by the applicants because of Mr Couch's postings outside South Australia is not sufficient to enable the provisions of s 118-135 to be invoked. In Re Chapman, Senior Member Sweidan had cause to consider Taxation Determination TD 51, which was issued by the respondent in March 1992 and dealt with the precursor to s 118-110. The Determination makes it clear that, from the respondent's perspective, whether a dwelling is a person's sole or principal residence depends on the facts of each case. It also states that "mere intention" to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption. Without seeking to rely on Taxation Determination TD 51, the Tribunal is of the opinion that something that is only an intention by a taxpayer to occupy a property as a main residence is insufficient to give rise to the exemption in s 118-110. That section contemplates that a dwelling will be occupied as a main residence throughout the ownership period, subject to the extension provisions in s 118-135. The fact is that the applicants did not reside in the Unit at any stage during the ownership period.

15. For the reasons above, the Tribunal is not satisfied that the main residence exemption in s 118-110 was available to the applicants in respect of the disposal of the Unit.


16. The objection decision under review is affirmed.

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