Edited version of your written advice

Authorisation Number: 1051318004160

Date of advice: 13 December 2017

Ruling

Subject: Capital gains tax- main residence- moving in as soon as practicable

Question

Will you be eligible for a main residence exemption for the period of time from settlement of your dwelling until your occupation of the dwelling?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You (You and your spouse) purchased a dwelling sometime after 20 September 1985.

You did not move into the dwelling and occupy it as your main residence.

You moved to another city so you could commence a new job and further some studies.

As you could not move into your dwelling you rented it out. It remained rented for the entire time you did not occupy the dwelling.

After a period of time away, you moved back to your home town, with the intention of moving into your dwelling.

Before you could do so, you began a new job, which required you to live on campus at a school. You remained living on campus for a number of years.

It was then your intention to move into your dwelling and occupy it as your main residence just before the birth of your first child.

Before you could do so, your spouse was unexpectedly transferred overseas to complete research and work as a requirement of their role and course of study.

You lived overseas for almost 12 months.

Upon returning from overseas, you moved into your dwelling and occupied it as your main residence.

For the purposes of this private ruling, you will dispose of the dwelling during the period of the ruling and will make a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Main residence exemption

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period is disregarded.

A capital gain or loss may only be partially disregarded if the dwelling was:

● not your main residence throughout your entire ownership period, or

● used for the purpose of producing assessable income.

A dwelling can only be considered a taxpayer’s main residence if the taxpayer actually occupies the dwelling. The mere intention of a taxpayer to occupy the dwelling as a main residence is insufficient to obtain the exemption.

Moving into the dwelling

Under section 118-135 of the ITAA 1997, a dwelling can be treated as your main residence from when you acquired your ownership interest in it until it actually became your main residence provided you moved into the dwelling when it was 'first practicable' to do so after acquiring your ownership interest.

The Explanatory Memorandum to the Bill which became the Tax Law Improvement Act (No.1) 1998, indicates that section 118-135 of the ITAA 1997 is intended to apply in situations where moving into the dwelling is temporarily delayed due to matters outside the persons control. The provision takes into account situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

The examples provided in Taxation Determination TD 92/147 illustrate the type of situations envisaged, for example, where repairs to the dwelling needed to be carried out, or your current employer gave you an assignment overseas for a few months.

However, it would not apply where a taxpayer is unable to move in because the dwelling is subject to a lease or where it is merely "inconvenient" to do so (Chapman v FC of T (2008) 71 ATR 689) (Chapman’s case).

In Chapman’s case, the taxpayer purchased a property in June 2001 but, because he worked in another city and for financial reasons, the property was rented out until he took up residence in September 2003. The Administrative Appeals Tribunal (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”.

In your case, you purchased a dwelling in your home town, with the intention of occupying it as your main residence. Before you could move into the dwelling, you moved away so that you could begin a new job. This prevented you from being able to move into the dwelling straight after acquiring it. Upon returning to your home town, you commenced another new job requiring you to live on campus for a further period of time. After that period, although you intended to move into your dwelling, this was again delayed with your spouse being transferred overseas for work and study. It was only upon your return from overseas, almost five years after you purchased the dwelling, that you moved in.

The dwelling was rented out for the entire time that you were unable to occupy it.

Your circumstances are considered comparable to the taxpayer in Chapman’s case, in that you did not move into the dwelling when it was first practicable to do so. There was a significant delay from when you acquired your ownership interest in the dwelling, to when you moved into the dwelling, and the circumstances surrounding the delays were not unforeseen. A mere intention to move in to a dwelling and occupy it as your main residence is not enough to satisfy the conditions of the exemption.

Although four years after purchasing the dwelling your spouse was unexpectedly transferred overseas for work, you had not been able to establish the dwelling as your main residence shortly after purchasing it four years earlier. The legislation does not allow you to treat the dwelling as your main residence from a particular date years after purchasing the dwelling, unless you actually move in.

Accordingly, you cannot treat the property as your main residence from the date of acquisition, or from the date you moved overseas. However, as you moved into the property after your return from overseas, you will be entitled to a partial main residence exemption.

Partial main residence exemption

If you are not fully exempt, you may be partially exempt if:

● the dwelling was your main residence during only part of the period you owned it

● you used the dwelling to produce assessable income, or

● the land on which the dwelling is situated is more than 2 hectares.

Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any loss or gain arising from a CGT event that occurs in relation to that dwelling. The capital loss or gain is calculated using the following formula:

Capital gain or loss x Non main residence days

Total days of your ownership period

The capital gain 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 will be the total number of days that the dwelling is not considered to be your main residence. This will cover the period from the date of settlement of the contract for purchase of the dwelling until the date you moved into the dwelling when you returned from overseas.

Days in your ownership period will be the total days from the date of settlement of the contract of purchase of the dwelling until the date of settlement of the contract of sale when the dwelling is sold.