Edited version of your written advice

Authorisation Number: 1012886552312

Date of advice: 29 September 2015

Ruling

Subject: Capital gains tax - main residence exemption - Commissioner's discretion

Question 1:

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)?

Answer:

Yes.

Question 2:

Will you be eligible to fully disregard the capital gain made on the disposal of the Unit?

Answer:

No.

This ruling applies for the following period

On or after 1 July 2016.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You purchased a unit (the Unit) after 20 September 1985.

The Unit was tenanted when you purchased it, with the tenant lease ending around nine months after settlement on the purchase of the Unit had occurred.

You moved into the Unit a few weeks after the tenant lease had ended and continued to live there for around seven months, when you moved out.

The Unit was rented out from the month after you had moved out and continued to be rented out until about the time that settlement on the disposal of the Unit occurred.

You attempted to sell the Unit around five years after you had purchased it.

You purchased another unit around seven years after you had purchased the Unit.

You sold the Unit, with settlement occurring over seven years after the settlement on the purchase of the Unit had occurred.

You engaged the services of a tax agent to prepare and lodge your relevant income tax return, in which a capital gain amount relating to the disposal of the Unit was included.

The absence choice had not been discussed with your tax agent when they were preparing your relevant income tax return.

You had not become aware of the absence choice until you had engaged the services of a new tax agent late in the subsequent year.

You wish to exercise the absence choice available in relation to the Unit.

You have provided copies of a number of documents, which should be read in conjunction with, and forms part of the scheme of this private ruling.

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 118-185

Reasons for decision

Main residence exemption

Generally, if you are an individual, you can ignore a capital gain or capital loss you make from a capital gains tax (CGT) event that happens to your ownership interest in a dwelling that is your main residence.

To get a full exemption from the CGT:

• the dwelling must have been your main residence for the whole period you owned it

• you must not have used the dwelling to produce assessable income; and

• any land on which the dwelling is situated must be two hectares or less.

The 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 some unforeseen circumstances, the exemption may still be available from the time you acquired your ownership interest in the dwelling.

In situations where you could not move into the dwelling 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.

If for a period you have two dwellings that could be regarded as your main residence, you must choose one of the dwellings for this exemption and CGT will apply to the other property. Once you make this choice, you cannot treat any other dwelling as your main residence for that period, except for a limited time if you are moving from one home to another.

When a CGT event happens to a dwelling that you acquired on or after 20 September 1985, and that dwelling was not your main residence for the whole time you owned it, you get only a partial main residence exemption.

If the dwelling was not your main residence for the whole time you owned it due to it being rented out, there is a choice that taxpayers can make that may entitle them to a full exemption, or extend the partial exemption they would otherwise get. This choice is discussed below:

Continuing main residence status after a dwelling ceases to be your main residence

In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it, known as the absence choice. You cannot make this choice for a period before a dwelling first becomes your min residence.

If you use the dwelling to produce assessable income, such as renting it out, you can choose to treat the dwelling as your main residence for up to six years after you stop living in it, starting from the date the dwelling is first available for rent.

Choices

The general rule under the CGT provisions is that you must make a choice by the day you lodge your income tax return for the income year in which the relevant CGT event occurred, or within a further time allowed by the Commissioner.

The way you, or any other entity making the choice, prepare your income tax return is sufficient evidence of the making of the choice, and once you make the choice it cannot be changed. Your choice is binding.

However, there are some circumstances when we consider that you have not made a choice. These are if you lodge you income tax return without being aware that:

• events have happened that required you to make a choice; or

• a choice was available.

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

• 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)

• 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)

• unsettling of people, other than the Commissioner, or of established practices;

• fairness to people in like positions and the wider public interest

• whether any mischief is involved; and

• consequences of the decision.

Each case is decided on the facts of that case.

Partial main residence exemption

Where a dwelling was your main residence for only part of your ownership period you are entitled to a partial main residence exemption.

The partial exemption is allowed based on the number of days the dwelling was your main residence using the following formula: 

Capital gain X __Non main residence days__

Days in your ownership period

Capital gain amount will be calculated as the difference between the capital proceeds received on the disposal of the dwelling, and the dwelling's cost base.

Non-main residence days is the number of days in your ownership period when the dwelling is not considered to be your main residence.

Days in your ownership period is the number of days in your total ownership period. That is the number of days from the date when settlement on the purchase of the dwelling occurred until the date that settlement on the disposal of the dwelling occurred.

Application to your circumstances

You disposed of the Unit in the relevant income year. Your relevant income tax return was prepared by your tax agent, who had not advised you of the absence choice and that you could make it in relation to the Unit.

You included a capital gain amount in your relevant income tax return in relation to the disposal of the Unit. This would indicate that you did not make the absence choice at the time you prepared your relevant income tax return.

However, you were not aware that there was a choice available to you under the CGT provisions until you spoke to your new tax agent, late in the subsequent year.

In considering your situation and the factors above, the Commissioner has determined that you will be allowed an extension of time for you to make the absence choice to treat the Unit as your main residence.

As a result of the Commissioner allowing you to make the absence choice, the main residence exemption will apply for the period from when the Unit was first available for rent after you moved out of it, until settlement on the disposal of the Unit occurred.

However, for a full main residence exemption to apply to all of your ownership period, the Unit must have been your main residence for your entire ownership period, or the combined periods that you had resided in it and any choices you made must cover your entire ownership period.

In your case, settlement on the purchase of the unit occurred, however you did not move into the Unit until a number of months after settlement occurred. As outlined above, it cannot be viewed that you had moved into the Unit as soon as practicable after you purchased the unit given that the delay in moving into the unit was because it was rented out, and continued to be rented out for a number of months after you had purchased it.

Therefore, the period starting from the date that settlement on the purchase of the Unit occurred until the date you moved into the Unit will not be covered by the main residence exemption or the absence choice.

As the Unit was not your main residence for the whole of your ownership period, you will only be entitled to a partial main residence exemption which will be calculated using the formula provided above.

In your case:

• The capital gain will be calculated as the difference between the capital proceeds you received on the disposal of Unit, less the cost base of the Unit. The first element of the cost base will be the amount paid to acquire the Unit.

Note: Any expenses you claimed as a deduction during the periods that the Unit was rented, or that can be claimed as a deduction, cannot be included in the cost base of the dwelling

• The Non-main residence days will be the days in the period from the date settlement on the purchase of the Unit occurred until the day you moved into the unit; and

• The Days in your ownership period will be number of days for the period from the date settlement on the purchase of the Unit occurred and the date settlement on the disposal of the Unit occurred.

Note: The capital gain can be reduced by the 50% CGT discount if you do not use the indexation method when calculating your capital gain on the disposal of the unit.