Edited version of private advice

Authorisation Number: 1051726429164

Date of advice: 24 July 2020

Ruling

Subject: Capital gains tax - main residence exemption

Question

Does section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to treat your dwelling as your main residence from the purchase date?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

In 20XX,you purchased a dwelling (Property A). You purchased Property A with your spouse. You intended to move into Property A as soon as settlement was completed and use it as your main residence.

Around the time of settlement of Property A, your spouse's grandparent became ill and required care. They didn't want to go into a nursing home, so you went and lived with them at their dwelling (Property B).

You rented out Property A to cover the mortgage costs while you were living with your spouse's grandparent between 20XX and 20XX. You moved back into Property A and lived there until 20XX. In 20XX, you purchased Property B. At that time, you moved out of Property A into Property B. You then began renting out Property A again from 20XX to 20XX. You sold Property A in 20XX.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 118-135

Reasons for decision

Summary

You are not able to treat the dwelling as your main residence from the purchase date under section 118-135 of the ITAA 1997.

Detailed reasoning

A dwelling is considered your main residence from the time you acquire your ownership interest in it, provided you move in as soon as practicable after your ownership interest in the dwelling commences. Your ownership interest will generally commence on the date of settlement of the purchase contract. The phrase 'as soon as practicable' is not defined in the legislation.

In 1998, section 118-135 was introduced into the ITAA 1997. The explanatory memorandum accompanying the introduction explained that the purpose of the section was to extend the main residence exemption to take into account the time needed to move into a dwelling. The purpose of the term 'as soon as practicable' is to provide some flexibility regarding what would otherwise require you to physically move into a dwelling on the date you acquired it for a dwelling to be considered your main residence from when your ownership interest commences.

The explanatory memorandum includes examples such as where there is a delay in moving in because of illness of the ownership interest holder or other reasonable cause. Section 118-135 of the ITAA 1997 is intended to apply in situations where moving into a dwelling is temporarily delayed due to reasons outside a person's control.

The factors against concluding that you moved into the dwelling as soon as practicable include:

·        the length of time between the date the dwelling was purchased and the date you first occupied it; and

·        what the dwelling is used for during that period (earning rental income).

Although you rented out the dwelling so that you could keep up with mortgage payments on The Property whilst caring for your spouse's grandmother, we do not consider that you moved into the dwelling as soon as practicable. The explanatory memorandum makes it clear that a period when the property is let out and during which rental income is being derived cannot qualify.

A dwelling can only be considered your main residence if you actually occupy 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).

In your case, although you intended to occupy the dwelling as your main residence, you did not actually do so for several years after you purchased The Property. In addition, the dwelling was rented out for several years before you occupied it.

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

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