Edited version of private advice

Authorisation Number: 1052132538599

Date of advice: 5 July 2023

Ruling

Subject: CGT - main residence

Question 1

Are you entitled to the full main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of the Property?

Answer

No.

Question 2

Are you entitled to a partial main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of the Property?

Answer

Yes.

This ruling applies for the following periods:

XX/XX/20XX to XX/XX/20XX

XX/XX/20XX to XX/XX/20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

In XX/20XX you entered a contract to purchase the Property with settlement occurring in February 20XX.

It was your intention to retire at the Property as soon as practicable following the sale of a home you previously owned, which occurred in XX/20XX.

In XX/20XX, you were made redundant. Notwithstanding you were XX years of age, this decision was unexpected.

In XX/20XX, the World Health Organisation declared Covid-19 a global pandemic. The State you were moving to implemented restrictions requiring all non-essential travellers to isolate in hotel quarantine for 14 days.

Given your employment situation and the pandemic restrictions, you decided to lease the Property out for XX months commencing XX/20XX (First Lease).

In XX/20XX you purchased a caravan and shortly thereafter, commenced your travels across the Country in your caravan. You decided that you would travel to the State you were moving to via a ferry as this was the most convenient means of transporting your pets and vehicles to the Property.

In XX/20XX your tenant cancelled the First Lease, and you offered a new lease to another tenant (Second Lease).

In XX/20XX upon the expiry of the Second Lease, you offered a third lease to the same tenant (Third Lease).

In XX/20XX, the State you were moving to allowed all travellers from your previous location to enter the state without the need to quarantine.

In XX/20XX the State you were moving to allowed all travellers from the State you were residing in, at that time, to enter the state without the need to quarantine. The ferry service was resumed.

In XX/20XX the Third Lease expired, and the Property was vacant.

In XX/20XX you submitted two applications to travel to the State you were moving to via the State you were residing in, the latter of which was approved.

In XX/20XX you travelled to the State where the Property resided and commenced occupation of the Property.

In XX/20XX you entered a contract to sell the Property with settlement occurring in XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-135.

Summary

It is considered that you did not move into the Property 'by the time it was first practicable for you to move into it' within the meaning of section 118-135 of the ITAA 1997 and the circumstances of temporary delays envisaged by the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 (the Explanatory Memorandum).

Detailed Reasoning

Section 118-135 of the ITAA 1997 provides "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."

The Explanatory Memorandum indicates that section 118-135 of the ITAA 1997 is intended to apply where moving into the dwelling is temporarily delayed due to matters outside the person's control. This then considers situations where, for example, there is a temporary delay in moving in because of illness or other reasonable cause. The Explanatory Memorandum provides that "The exemption does not extend to cases where an individual is unable to move into the dwelling because it is being rented out."

Whether the dwelling becomes the taxpayer's main residence as soon as practicable depends on the facts of each case. The personal circumstances of the taxpayer may be relevant in limited cases only. Taxation Determination 92/147 Income tax: capital gains [TD 92/147] outlines examples of these cases, such as where immediate repairs to the dwelling are needed to be carried out, or your current employer gave you a temporary work assignment in a different location for a very short period of time such as a few months.

However, the factors against concluding that an individual 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 (an example being to earn rental income).

The extension of the main residence exemption will not apply in the situation where a taxpayer purchases a property with the intention of occupying it as their main residence but never actually occupies the property (Couch and Commissioner of Taxation [2009] AATA 41) (Couch's case).

In Couch's case, 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 Administrative Appeals Tribunal (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 enough to invoke section 118-135 of the ITAA 1997.

In Chapman and Commissioner of Taxation [2008] AATA 421 (Chapman's case), the taxpayer purchased a property in June 2001 but, because they worked in another city and for financial reasons, the property was rented out until they took up residence in September 2003. The AAT said that 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. Further, the tribunal stated that the phrase "time it was first practicable" should not be read to mean "the time it was first convenient".

A similar decision was held in Caller and Commissioner of Taxation [2009] AATA 890 (Caller's case), 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 there was a period when the property was being rented out, and during which rental income was being derived, and therefore they could not qualify for the main residence exemption.

Application to your circumstances

In your case, the reasons why you delayed moving into the Property were because of your financial situation, because the Property was leased out, and because you wanted to travel via the ferry. It is apparent from the Chapman Case and the Caller Case that financial circumstances and the fact a dwelling may be leased out are outside the scope of temporary delays envisaged by the Explanatory Memorandum.

Whilst we appreciate that it may have been more convenient for you to travel via the ferry, rather than directly fly to the intended location, the phrase "time it was first practicable" in section 118-135 of the ITAA 1997 should not be read to mean "the time it was first convenient" (Chapman's Case). Accordingly, the period from when you purchase the Property until when you moved in is subject to CGT.

Partial main residence exemption from CGT

Section 118-185 of the ITAA 1997 provides that you are entitled to a partial exemption from CGT where a dwelling was your main residence for part of your ownership period. Subsection 118-185(2) of the ITAA 1997 provides a formula which allows you to adjust the capital gain or capital loss amount calculated on disposal of the property to take into account the proportion of your main residence days in the property to the total number of ownership period days of the property.

You are entitled to a partial main residence exemption on the Property from when you moved into the Property until when it was sold.

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