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Ruling

Subject: Capital gains tax - absence choice

Question and answer

Will the Commissioner allow further time for you to make an absence choice under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your spouse purchased property A in 2001.

You and your spouse lived in the property as your main residence until 2006.

You and your spouse moved interstate and rented out the property from this date.

You purchased property B and started living in it.

Property A was rented from 2006 until 2010. This property was then sold in 2010.

You and your spouse declared a capital gain in your tax returns for the year ended 30 June 2011.

You used the services of a tax agent to prepare your 2011 tax returns.

You and your tax agent were not aware of the absence choice available for main residence when preparing your 2011 tax returns.

You and your spouse wish to exercise the absence choice available to elect to continue to treat the property as your main residence from when you stopped living in it from 2006.

You believe that you have acted promptly in advising us that you now wish to make the choice to apply the main residence exemption to property A.

As your 2011 tax returns have been lodged and notice of assessments issued you now wish to amend these returns to exclude the capital gain declared at item 18.

Assumptions

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 103-25

Income Tax Assessment Act 1997 Section 118-145

Reasons for decision

Subsection 118-145(1) of the ITAA 1997 allows a taxpayer to make a choice that a dwelling continues to be treated as their main residence even though it has ceased to be so. The choice can be made for a total of six years where the dwelling was used for the purpose of gaining or producing assessable income.

If an individual does elect to treat a dwelling as their main residence after they have moved out of it, no other dwelling can be treated as their main residence during the same period.

Subsection 103-25(1) of the ITAA 1997 provides that a choice must be made:

(a)      by the day you lodge your income tax return for the income year in which the relevant CGT event happened or

(b)      within a further time allowed by the Commissioner.

The way you (and any other entity making the choice) prepare your income tax return is sufficient evidence of the making of the choice (subsection 103-25(2) of the ITAA 1997).

You and your spouse included a capital gain in your income tax returns for the year ended 30 June 2011. This would indicate that you did not make the absence choice at the time you prepared your income tax returns.

The general rule is that a choice available under the capital gains tax (CGT) provisions, once made, cannot be changed. However, the Commissioner considers that if a taxpayer does not actually consider certain CGT concessions, then it could not be said that the taxpayer actually makes a choice.

In determining if the discretion to allow further time would be exercised, the Commissioner has considered the following factors:

(a) evidence of an acceptable explanation for the period of extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension)

(b) prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension)

(c) unsettling of people, other than the Commissioner, or of established practices;

(d) fairness to people in like positions and the wider public interest

(e) whether any mischief is involved; and

(f) consequences of the decision.

Your tax return was prepared by a tax agent who should know the CGT concessions available considering a tax agent's level of skill and knowledge in preparing tax returns. However, your tax agent has stated it was a departmental error that they were not aware of a main residence choice. Furthermore, you and your spouse were not aware there was a choice available to you under the CGT main residence provisions.

In considering your situation and the factors above, the Commissioner has allowed an extension of time to make a choice under subsection 118-145(1) of the ITAA 1997 to treat the property as your main residence from the time you moved out until the time you sold it.

Please note that if you do elect to treat a dwelling as your main residence after you have moved out of it, no other dwelling can be treated as your main residence during the same period. This means that you will get only a partial exemption when a CGT even happens in relation to your new home.