Edited version of your written advice

Authorisation Number: 1051234371373

Date of advice: 13 June 2017

Ruling

Subject: Capital gains tax main residence exemption

Question 1

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

Answer

No.

Question 2

Are you entitled to a partial main residence exemption under section 118-185 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period(s)

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You acquired ownership interest in a property (the Property) at a date after 20 September 1985 when the title was transferred from your parents into your sole name.

At the time of the transfer, the Property was tenanted by long term tenants.

The tenants vacated the Property in 19XX and you continued to lease out the Property.

In 20XX, you moved into the Property and at that time made it your main residence.

You lived in the Property as your main residence from 20XX to 20XX.

You moved out and rented alternate premises in 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118B

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

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Subsection 118-185(2)

Reasons for decision

Question 1

Subdivision 118B of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss you make from a capital gains tax (CGT) event that happens to a dwelling that is your main residence, can be ignored. Section 118-100 of the ITAA 1997 provides that this exemption does not apply in full if:

● it was your main residence during part only of your ownership period; or

● it was used for the purpose of producing assessable income.

Section 118-135 of the ITAA 1997 provides that if you move in as soon as practicable after acquiring your ownership interest, then the dwelling is treated as your main residence from when the interest is acquired until it actually became your main residence. The Commissioner’s view of the phrase ‘as soon as practicable’ is presented in Tax Determination 92/147 (TD 92/147). As soon as practicable means that, unless there are unforeseen circumstances, or events happen beyond your control you must move into the dwelling as soon as possible. The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 explains that section 118-135 of the ITAA 1997 is not extended to the situation where the individual is unable to move into the dwelling because it is being rented out.

This view is reinforced in the case of Chapman v Federal Commissioner of Taxation [2008] AATA 421 (Chapman’s case). In Chapman’s case, the taxpayer purchased a property in Perth in June 2001 and continued to work in Kalgoorlie. During the first 6 months that the taxpayer worked in Kalgoorlie, the dwelling was rented to the vendors. At the end of the 6 months, the taxpayer rented the dwelling out to another party. In this case, the Commissioner deemed that the dwelling became the taxpayer’s main residence on 23 September 2003 and this fact was not disputed. The taxpayer submitted that his intention upon purchase was to move into the property, but was unable to do so owing to work commitments and financial constraints. The Commissioner determined that the taxpayer had not met the conditions of section 118-135 of the ITAA 1997. The tribunal stated that the determination of the Commissioner was affirmed and that the “time it was first practicable” should not be read to mean “the time it was first convenient”.

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

In your circumstances, title to the Property was transferred into your sole name on a date after 20 September 1985. The Property was tenanted at that time and remained leased until you moved in in 20XX. From 20XX to 20XX you lived in the Property as your main residence.

Accordingly, the Property was not your main residence for your entire ownership period and you are not entitled to a full main residence exemption.

Question 2

Section 118-185 of the ITAA 1997 provides that you can apportion the number of days that a dwelling was not your main residence against the number of days in total that you owned it, provided a few conditions are met. The conditions imposed in subsection 118-110(1) of the ITAA 1997 are that you must be an individual, the dwelling was your main residence through the ownership period and the interest did not pass to you as beneficiary of an estate.

The formula is provided in subsection 118-185(2) of the ITAA 1997 and is as follows:

CG or CL amount x (Non-main residence days/days in your ownership period)

You are an individual, the Property was your main residence for the period that you lived in it from 20XX to 20XX and you did not obtain the dwelling as a beneficiary of a deceased estate. Accordingly, you are entitled to a partial main residence exemption found under section 118-185 of the ITAA 1997.