Edited version of your written advice

Authorisation Number: 1051194637878

Date of advice: 28 February 2017

Ruling

Subject: CGT - Main Residence Exemption

Question 1

Are you entitled to a full capital gains tax (CGT) exemption for your property (the Property)?

Answer

No.

Question 2

Are you entitled to a partial CGT exemption for the Property?

Answer

Yes.

This ruling applies for the following period(s)

Year ending 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You contracted to purchase the property (the Property) in early-mid 20XX.

Settlement on the Property occurred in mid 20XX.

You entered into a lease with an unrelated party for the Property for the period of approximately four months in 20XX

You left the country in mid 20XX for an overseas holiday.

You returned to the country in mid 20XX.

At this time you organised your personal effects to be transported from your current rental accommodation to the Property.

You moved into the Property when you returned from the conference in mid 20XX.

In early 20XX you chose to move out of the Property and move into alternate accommodation.

For the period of early 20XX until the Property was sold, you used it to produce assessable income.

In mid-late 20XX you contracted to purchase another property and settlement occurred in mid-late 20XX.

In mid-late 20XX you contracted to sell the Property and settlement occurred in late 20XX.

You did not own another dwelling until the purchase of the second property.

You did not move back into the Property after you left in early 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118B

Income Tax Assessment Act 1997 Subsection 118-110(1)

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Subsection 118-185(2)

Reasons for decision

Question 1

Detailed reasoning

When a dwelling becomes your main residence

Subdivision 118B of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss you make from a capital gains tax (CGT) event that happens to a dwelling that is your main residence, can be ignored. Section 118-100 of the ITAA 1997 provides that this exemption does not apply in full if:

● It was your main residence during part only of your ownership period; or

● It was used for the purpose of producing assessable income.

Section 118-135 of the ITAA 1997 provides that if you move in as soon as practicable after acquiring your ownership interest, then the dwelling is treated as your main residence from when the interest is acquired until it actually became your main residence. The Commissioner's view of the phrase “as soon as practicable” is presented in Tax Determination 92/147. As soon as practicable means that, unless there are unforeseen circumstances, or events happen beyond your control you must move into the dwelling as soon as possible. The examples in TD 92/147 show that electing to go on a holiday and moving in upon return is not considered as soon as practicable.

This view is reinforced in the case of Chapman v Federal Commissioner of Taxation [2008] AATA 421 (Chapman's case). In Chapman's case, the taxpayer purchased a property in Perth in June 2001 and continued to work in Kalgoorlie. During the first 6 months that the taxpayer worked in Kalgoorlie, the dwelling was rented to the vendors. At the end of the 6 months, the taxpayer rented the dwelling out to another party. In this case, the Commissioner deemed that the dwelling became the taxpayer's main residence on 23 September 2003 and this fact was not disputed. The taxpayer submitted that his intention upon purchase was to move into the property, but was unable to do so owing to work commitments and financial constraints. The Commissioner determined that the taxpayer had not met the conditions of section 118-135 of the ITAA 1997. The tribunal stated that the determination of the Commissioner was affirmed and that the “time it was first practicable” should not be read to mean “the time it was first convenient”.

Where section 118-135 of the ITAA 1997 does not apply because taxpayer does not move into a residence as soon as practicable, the residence will only be treated as their main residence for CGT purposes from the date they actually move into the dwelling.

In your circumstances, you purchased the Property, which settled in mid 20XX (the date at which you gained the ownership interest). You leased the Property to an unrelated party from mid 20XX to mid-late 20XX and did not move in until mid-late 20XX. You chose to go on holiday, attend an overseas conference, and lease the Property to an unrelated party. None of these events were unforseen or beyond your control, therefore you cannot be considered to have moved in to the Property as soon as practicable and the Property will not be treated as your main residence for CGT purposes from the date you acquired it under section 118-135 of the ITAA 1997. The Property will be treated as your main residence from the date you actually began to occupy it.

Accordingly, the Property was not your main residence for your entire ownership period and you are not entitled to a full main residence exemption.

Question 2

Detailed Reasoning

Absence rule

Section 118-145 of the ITAA1997 provides that if a dwelling was your main residence, you may continue to treat it as your main residence. If you use your main residence to produce assessable income, the maximum that you can treat it as your main residence is six years. The six years will restart if you have moved back into the dwelling and then moved back out again. If you make the choice to treat the dwelling as your main residence whilst you are absent, you may not treat any other dwellings as your main residence whilst you choose to use the absence exemption in section 118-145 of the ITAA 1997.

Although you ceased to occupy the Property in early 20XX, you can make a choice under section 118-145 of the ITAA 1997 to continue to treat the Property as your main residence after you moved out. As the Property was used to produce assessable income, the maximum period that you can make this choice for is six years.

Partial main residence exemption

Section 118-185 of the ITAA 1997 provides that you can apportion the number of days that a dwelling was not your main residence against the number of days in total that you owned it, provided a few conditions are met. The conditions imposed in subsection 118-110(1) of the ITAA 1997 are that you must be an individual, the dwelling was your main residence through the ownership period and the interest did not pass to you as beneficiary of an estate.

The formula is provided in subsection 118-185(2) of the ITAA 1997 and is as follows:

● CG or CL amount x (Non-main residence days/days in your ownership period)

The example provided in section 118-185 of the ITAA 1997 is that:

A taxpayer buys a house in July 1990 and moved in immediately. In July 1993, they moved out and began to rent it. They then sold the property in June 2000, making a capital gain of $10,000.00.

They chose to continue to treat the dwelling as their main residence under section 118-145 of the ITAA 1997 for the first 6 of the 7 years that the residence was rented out.

Under this section, you will be taken to have made a capital gain of:

$10,000.00 x (365/3650) = $1,000.00.

You are an individual, the Property was your main residence for the period that you lived in it from mid-late 20XX to early 20XX and you did not obtain the dwelling as a beneficiary of a deceased estate. Accordingly, you are entitled to a partial main residence exemption found under section 118-185 of the ITAA 1997.

Further issues to consider

If you make the choice under section 118-145 of the ITAA 1997 to continue to treat the Property as your main residence after you moved out in early 20XX, your 'non-main residence days' would include the period from when you acquired your ownership interest to when you moved into the Property in addition to the period six years after moved out in early 20XX to when your ownership interest ended.

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