Edited version of private advice

Authorisation Number: 1051527277435

Date of advice: 14 June 2019

Ruling

Subject: Capital gains tax - main residence exemption

Question

Will you be entitled to a full main residence exemption on the disposal of the Property?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You, being Person A and Person B, immigrated to Australia at the beginning of 20XX when you were both over XX years of age.

You both commenced employment with an educational institution during the following year in the roles as outlined below:

• Person A - caretaker position which involved them being responsible for the security of the employer's premises in addition to working in the maintenance department. A three bedroom house (the House) was provided as part of Person A's remuneration package and it was a requirement of their role for them to be onsite.

·         During weekends, and Person A's holidays, a security firm was engaged to look after their employer's premises. During holidays Person A worked on business days.

• Person B - housemother to boarding students, which they continue to hold up to this point. In this role they provided various support to the students, but was not required to be on site. Person B does not work during school holidays.

You did not have a large amount of superannuation funds and were concerned that you did not have a private home.

You entered into a contract to purchase the Property in 20XX with settlement occurring the following month.

The Property was in a neglected condition and Person A, who has a trade, undertook a lot of the work required to improve the condition of the Property for a number of years.

You stayed at the House during the period from settlement date on the purchase of the Property until you moved into Property X (as outlined below) except for the following periods:

·         settlement date on the purchase of the Property until renovation work on the Property ended - you stayed at the Property on weekends when you renovated the Property, in addition to Person A working on the Property for a number of hours each morning; and

·         following the completion of renovations on the Property until you moved into Property X - Person A stayed at the Property a couple of nights per week. Person B stayed at the Property four nights per week in addition to all school holidays if the Property was not rented out.

During the periods you stayed at the House your mail was sent to both the school and the Property.

The Property was used for short-term 'Homestay type accommodation' and was advertised online. During the periods the Property was rented, you stayed at the House. The rental periods ranged from X to XX nights and over the years the Property has been rented out for between XX to XXX nights per year. Future bookings for XX nights for the 2019-20 income year have been received at this point.

All areas of the Property, with the exception of the garage, are available to visitors when the Property is rented out. The Property is rented fully furnished and your personal belongings were locked in the garage during the rental period.

More than twelve months after the Property was purchased, you purchased Property X which was rented out a number of months after it was purchased.

After a number of years Person A was made redundant without any prior notice and their employment ceased.

You gave the tenants Property X notice and you moved into this property, which has been your main residence since that time.

You have been paying land tax on Property X but not on the Property.

You will dispose of the property in the 20XX financial year and you will make a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-175

Reasons for decision

Main residence

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period is disregarded.

A capital gain or loss may only be partially disregarded if the dwelling was:

·         not your main residence throughout your entire ownership period, or

·         used for the purpose of producing assessable income.

A dwelling can only be considered a taxpayer's main residence if the taxpayer actually occupies the dwelling. A mere intention to construct a dwelling or to occupy a dwelling as a main residence, but without actually doing so, is insufficient (Couch & Anor v FC of T 2009 ATC) (Couch case).

These considerations were accepted by the Administrative Appeals Tribunal (AAT) as relevant, though not exhaustive, in Case 26/93, 93 ATC 320 but the AAT added that it also saw as relevant the consideration whether the applicant freely chose, or was obliged, to spend time at one residence or another.

The AAT referred to the comments of Williams J in Koitaki Para Rubber Estates Ltd v FC of T (1941) 6 ATD 82 at p 87; (1941) 64 CLR 241 at p 249:

The place of residence of an individual is determined, not by the situation of some business or property he is carrying on or owns, but by reference to where he eats and sleeps and has his settled or usual abode.

The AAT said that the further question of whether a dwelling is a person's principal residence is essentially a matter of fact and degree and that, in determining this question, the decision-maker had to make a common sense assessment taking into account a number of varying and even conflicting circumstances. The element of continuity of living arrangements was said to be a factor in deciding where one lives. Where, however, a person resided at more than one place, the problem became more complex.

Only one dwelling can be the main residence of a taxpayer at common law if they have more than one dwelling available for them to reside in during a particular period.

There are several extensions to the main residence exemption which can affect your entitlement to the main residence exemption under the CGT provisions, depending upon your individual circumstances.

One extension to the basic rule which allows you to continue the main residence exemption after the dwelling ceases to be your main residence, and is commonly known as the absence choice.

The absence choice provides that if you leave your dwelling, such that it is no longer your main residence, you may choose to continue to treat it as your main residence, even if you have rented it out, provided certain criteria are met. However, you cannot make this choice for a period before the dwelling first becomes your main residence.

Moving into a dwelling

Under section 118-135 of the ITAA 1997, a dwelling can be treated as your main residence from when you acquired your ownership interest in it until it actually became your main residence provided you moved into the dwelling when it was 'first practicable' to do so after acquiring your ownership interest.

Section 118-135 of the ITAA 1997 is intended to apply in situations where moving into the dwelling is temporarily delayed due to matters outside the persons control. The provision takes into account situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

What period would be covered by the expression 'first practicable' would depend on all the circumstances of the particular case.

In Chapman v FC of T 2008 ATC, the taxpayer purchased a property in Perth in June 2001 but, because he worked in Kalgoorlie and for financial reasons, the property was rented out until he took up residence in September 2003. The AAT held that the words 'the time it was first practicable " in section 118-135 of the ITAA 1997 should not be read down to mean ' the time it was first convenient' and, in this situation, it was clear that the taxpayer did not move into the residence by the time it was first practicable to do so after the property was acquired.

Section 118-135 of the ITAA 1997 was also held not to apply in the Couch case, where the taxpayers acquired a property in 2000 with the intention of residing in it as their matrimonial home. However, due to employment circumstances, the property was rented out until it was sold in 2006, without the taxpayers having resided in it. The AAT held that the fact that the property was continually being leased and was not being occupied by the taxpayers because of employment circumstances was not sufficient to invoke section 118-135 of the ITAA 1997.

A similar result was achieved in Caller & Anor v FC of T 2009 ATC where the husband and wife taxpayers purchased a property in 2001 but, as the husband had been transferred 600 kms away for work, they leased it to a tenant until April 2004 when they took occupation of it. They subsequently sold it in 2006 but their claim for the exemption on the basis that they had moved into the property as soon as it was " first practicable " was denied. The AAT found that it was clear that a period when the property was let out and during which rental was being derived could not qualify for the exemption.

Application to your situation

In this situation you purchased the Property at a time you were employed and stayed in the House provided by Person A's employer as part of their remuneration. You purchased Property X a number of years after you had purchased the Property, which you rented out for a number of years before you moved into it when your employment ceased and it became your main residence, which it continues to be until the present time.

Based on the information provided, you had a number of properties that you could reside at during the period covered by this ruling and we need to determine your common law main residence during the ruing period and if you are eligible for a full main residence exemption in relation to the Property under the CGT provisions.

When determining whether you are entitled to a full main residence exemption on the sale of the Property we have made the following observations:

It has been stated that due to your ages when you immigrated to Australia in addition to your concerns that you did not have many superannuation funds or a private home, you had purchased the Property with the intention to live there and make it your home as you did not always have to be at the House and preferred to be in your own home.

However, based on the information provided while you were legally entitled to move into the Property when settlement had occurred, you had continued to live at the House as it was part of the condition of Person A's employment that they be onsite at their employer's premises. Your circumstances are considered comparable to the taxpayer in Chapman's case, in that you did not move into the Property when it was first practicable to do so.

Additionally, while it had been your intention to move into the Property, by purchasing the Property when Person A had to remain onsite at their employer's premises in accordance with their employment agreement you have by your own actions put yourselves in a position whereby it was not possible for the Property to be your main residence until Person A's employment ended, and there was no longer a requirement for them to reside onsite at their employer's premises with the House being your usual place of abode. While Person B could have moved into the Property, they chose to reside at the House with Person A.

It is stated that the Property was in a neglected condition when it was purchased with renovations being undertaken for a number of years after the settlement date. During that period you resided at the House, staying at the Property on weekends, with Person A working on the Property every morning.

From the time the renovations were completed until you moved into Property X you stayed at the Property as follows:

·         Person A stayed there for two nights each week; and

·         Person B stayed there for four nights each week.

During other times during the above period you resided at the House.

The facts of your situation indicate that the House continued to be a residence available to you when you stayed at the Property and you returned to the House after your stays at the Property.

While you have stayed at the Property, this is not sufficient to make it your main residence if you have stronger ties to another dwelling. Person A was not in a position to establish the Property as their main residence until they were no longer required to be onsite at their employer's premises and until that occurred the House was their common law main residence. Person B, through their actions has made the House their common law main residence and also had not established the Property as their main residence.

The Property commenced being used for short-term accommodation purposes after the renovations were completed until the present time for various periods during each income year. The Property was rented fully furnished with visitors having access to all of the Property with the exception of the garage where you stored your personal items. During the periods the Property was rented out you resided at the House.

The periods of time that you stayed at the Property from the time it commenced being used for short-term accommodation could be comparable to someone with a holiday house that stays there during various periods during the year such as weekends and holidays. Additionally, the rental of the Property fully furnished is not dissimilar from anyone renting out a fully furnished holiday home.

When Person A's employment was terminated you made a personal choice not to move into the Property and had moved into Property X.

It is not viewed that during the various periods you stayed at the Property when it was not being rented out that you established the Property as your main residence and after each stay you returned to the House. Therefore, you are not eligible to make the absence choice to extend the main residence exemption as the Property was not your main residence at any point during the period covered by this ruling.

It is stated that you have been paying land tax on Property X and not the Property. A relevant department have considered the Property to be your principal place of residence despite the fact that the Property had been rented at times.

While you have not been paying land tax in relation to the Property, land tax is a state tax that is not relevant to determining whether the Property was your main residence for CGT purposes. The decision of whether a property qualifies as a principal place of residence for Revenue SA purposes does not reflect any taxation obligations imposed by the Federal Government, such as CGT. Therefore, the fact that land tax was not paid in relation to the Property does not support that it was your main residence for CGT purposes.

Based on the information provided:

·         from when you commenced employment until settlement on the purchase of the Property occurred, the House was your sole residence and therefore your main residence;

·         from settlement date on the purchase of the Property until the renovations on the Property were completed, you resided at both the House and the Property. Considering all of the facts of your case, the House continued to be your main residence during this period;

·         from the time you commenced using the Property for short-term accommodation to the date you moved into Property X, you resided at both the House and the Property. Considering all of your facts, including the number of days that the Property was rented, the House continued to be your main residence during this period; and

·         from the date you moved into Property X until the present time, Property X has been your main residence, therefore the Property cannot be your main residence during this period.

You will not be entitled to a full main residence exemption on the disposal of the Property because it has not been your main residence.

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