Edited version of private advice

Authorisation Number: 1051771863025

Date of advice: 26 October 2020

Ruling

Subject: Capital gains tax - main residence exemption

Question

Are you entitled to the full main residence exemption on the sale of the new property?

Answer

No

Question 2

Are you entitled to a partial main residence exemption on the sale of the new property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You entered into a contract to purchase the new property.

A short time later settlement occurred on the new property.

You intended for the new property to be your main residence.

The new property had a fixed tenancy agreement in place on purchase.

Your old property sold at approximately the same time as settlement occurred on your new property.

The sale of the old property was conditional upon the buyers obtaining finance.

It took several months for the buyer's finance to be approved.

Because of Covid19 the buyers' jobs were not secure and they asked you for extension to obtain finance approval three times.

As the settlement period for the old property was extended you needed to borrow funds to purchase the new property.

You could not service the borrowed funds for the new property unless the new property was rented out.

You allowed the tenant to stay in the new property after fixed tenancy agreement had expired.

Once the buyers were approved finance, you contacted the property manager of the new property asking them to give the tenant notice to leave.

As a result of Covid19 it was not possible to give the tenant notice to leave without an application to the states Civil and Administrative Tribunal (CAT).

The tenant decided to vacate the new property before the CAT hearing.

The tenant had moved out of the new property 3 months after settlement occurred.

Short after the tenants had moved out of the new property you moved into the new property.

Nearly four months after the old property was sold settlement occurred on the old property.

You aim to sell the new property as soon as possible as you don't like living in the capital city.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-135

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, CGT event A1, occurs when you dispose of a CGT asset to someone else. For example, if you sell a property, land and dwellings are CGT assets.

Under section 118-110 of the ITAA 1997, you can generally disregard any capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it when:

·         the dwelling was your home for the whole period you owned it;

·         the dwelling was not used to produce assessable income; and

·         any land on which the dwelling is situated is not more than two hectares.

You are only able to treat one dwelling as your main residence at any time (apart from limited circumstances where you are changing main residences).

You only get a partial exemption for a CGT event that happens in relation to your ownership interest in a property if the dwelling was your main residence for only part of your ownership period.

A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time.

If you purchased the dwelling this would generally be the date of settlement of the purchase contract. However, if there is a delay in moving in because of illness or other unforeseen circumstances, the exemption may still be available from the time you acquired your ownership interest in the dwelling.

ATO ID 2001/744 Income tax: Capital gains tax: moving into a dwelling, explains that if you could not move into a property because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest. A mere intention to occupy a dwelling as your main residence - without actually doing so - is not sufficient to obtain the exemption.

In your case, you purchased a new property with the intention of it being your main residence.

At the time you purchased the new property it was rented out. You needed these renters to remain in the new property because you were unable to service both the loan for the new property and the loan on your old property, as the sale of the old property had not yet settled.

As stated in ATO ID 2001/744 if you could not move into the property because it was being rented out you are not considered to have moved into the property as soon as practicable after you acquired it.

You first moved into the new property approximately three months after settlement.

It is at this point that the new property can be considered to have become your main residence.

As the property was purchased approximately three months prior to you moving into it and it was rented for that time, the sale of the new property will not be fully exempt from CGT.

Other relevant comments

If a CGT event happens to a dwelling you acquired on or after 20 September 1985, and that dwelling was not your main residence for the whole time you owned it, you may be eligible for a partial exemption. Partial main residence is calculated as follows:

Your ownership period begins on the date of settlement.

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