Edited version of private advice

Authorisation Number: 1051855811167

Date of advice: 5 July 2021

Ruling

Subject: Capital gains tax - main residence exemption

Question

Does section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to treat the property as your main residence from the purchase date?

Answer

No.

This ruling applies for the following period periods:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You migrated to Australia in late 20XX, where you lived with the parents of Applicant A.

Applicant A's parents had migrated to Australia shortly before this time.

You purchased an Australian property (the property) in mid-20XX.

You have supplied a copy of the property purchase contract which confirms that the transfer date was in mid-20XX.

Your intention was to live in the property at the time of the purchase, however a few days after you purchased the property Applicant B experienced a significant medical event (the medical event).

Due to medical reasons, following the medical event Applicant B was unable to be left for long periods of time on their own.

Therefore, given the family dynamics it was decided that you would stay in Applicant A's parent's house until Applicant B's personal circumstances improved.

You stated in your application that Applicant B was in a fragile state for several months following the medical event, and as such they did not want to be alone whilst Applicant A worked offshore on an erratic schedule, as they was in casual employment with multiple different employers.

In addition, living with Applicant A's parents allowed Applicant B some mental support whilst Applicant A was away.

At the time of the purchase Applicant A was employed on a casual basis working offshore with multiple employers (between early 20XX and mid-20XX), where their roster varied, sometimes working X to X weeks offshore and then spending X to X weeks at home.

Between mid- 20XX and mid-20XX Applicant A worked offshore on X separate facilities in casual employment, and at that time there was no certainty on roster length or time to be spent at home in Australia.

Applicant A received confirmation of permanent employment in Australia in approximately early- to- mid- 20XX, which was scheduled to commence in mid-20XX.

Having received this offer of permanent employment, Applicant A served one last period of casual employment on the offshore facility (which they had previously committed to), and Applicant A returned to Australia in mid-20XX, and it was at this time you were both certain that you could move to the location of the property since Applicant A was to start a regular roster from shortly after this so they could be home with Applicant B on a regular basis to support them.

As such, once Applicant A got some sort of regular employment roster (which was to commence in mid-20XX), you agreed that you could move into the property at the commencement of Applicant A's employment in mid-20XX.

You stated in your application that had it not been for the medical event you would have moved into the property as your main residence, with Applicant A spending their time on work breaks at the property with Applicant B.

The property was rented out for X months shortly after the time of purchase as you felt it was better than leaving the house vacant. The lease on the property was not extended past the X months, however the tenants continued to live there on an ongoing basis on the understanding (via the rental property manager) that as soon as you could both move into the property when Applicant A had a regular work roster in Australia, they would need to move out of the property.

As such, you moved into the property in mid-20XX as your main residence until mid-20XX.

Shortly after mid-20XX and onwards, the property has been rented out due to Applicant A accepting a different job in a different location with employer provided accommodation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-135

Reasons for decision

Summary

You are not able to treat the property as your main residence from the purchase date in accordance with section 118-135 of the ITAA 1997.

Detailed reasoning

In 1998, section 118-135 was introduced into the ITAA 1997 which extends the main residence exemption to take account of the time needed to move into a dwelling. It includes the period from when the taxpayer acquired the main residence to when it was first practicable to move into the dwelling after it was acquired.

As such, a dwelling is considered your main residence from the time you acquire your ownership interest in it, provided you move in as soon as practicable after your ownership interest in the dwelling commences. Your ownership interest will generally commence on the date of settlement of the purchase contract.

The phrase 'as soon as practicable' is not defined in the legislation.

However, the Explanatory Memorandum (EM) accompanying the introduction of section 118-135 (The EM to the Tax Law Improvement Bill (No. 1) 1998) explains that whilst section 118-135 is intended to take account of situations where there is a delay in moving in because of illness or other reasonable cause, it is not extended to the situation where the individual is unable to move into the dwelling because it is being rented out.

The Explanatory Memorandum includes examples such as where there is a delay in moving in because of illness of the ownership interest holder or other reasonable cause. As such, section 118-135 of the ITAA 1997 is intended to apply in situations where moving into a dwelling is temporarily delayed due to reasons outside a person's control.

In addition, 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 gives you an assignment overseas for 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 (earning rental income).

In addition, a dwelling can only be considered your main residence if you occupy the dwelling. A mere intention to construct a dwelling or to occupy a dwelling as a main residence, but without actually doing so, is insufficient (Couch & Anor v FC of T 2009 ATC) (Couch's case).

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 Perth in June 2001, but because he worked in Kalgoorlie and for financial reasons, the property was rented out until he took up residence in September 2003. The AAT held that the words 'the time it was first practicable " in section 118-135 of the ITAA 1997 should not be read down to mean ' the time it was first convenient' and, in this situation, 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.

Section 118-135 of the ITAA 1997 was also held not to apply in Couch's case, where 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 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.

A similar result was achieved in Caller & Anor v FC of T 2009 ATC (Caller and Anor'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 a period when the property was let out and during which rental was being derived could not qualify for the exemption.

Application to your circumstances

In your case, you purchased a property with the intention of living in it as your main residence. However, a few days after that Applicant B suffered a medical event which had a severe impact upon their physical and mental health.

As such, Applicant B was unable to be left for long periods of time on their own.

Due to Applicant A's work situation at that time, whereby they was required to spend significant periods offshore, you made the decision not to move into the property until such a time that Applicant A could obtain regular local employment, which would ensure that Applicant B was not left on their own for long periods of time when you moved into the property.

You also made the choice to rent the property out as you felt that option was better than leaving the property vacant.

Had you have moved into the property at the time of the purchase, Applicant B would have spent significant periods of time on their own, given that Applicant A worked offshore until mid-20XX.

However, Applicant A eventually obtained regular local employment which commenced in mid-20XX, which is when you moved into the property.

Based on your circumstances we do not consider that you moved into the dwelling as soon as practicable.

The Explanatory Memorandum explains that section 118-135 is intended to take account of situations where there is a delay in moving in because of illness or other reasonable cause. It follows that Section 118-135 of the ITAA 1997 is intended to apply in situations where moving into a dwelling is temporarily delayed due to reasons outside a person's control.

However, the Explanatory Memorandum makes it clear that a period when the property is let out and during which rental income is being derived cannot qualify. This principle was also clearly outlined in Couch's Case, Chapman's case and Caller and Anor's case.

We do not consider that your circumstances fit within the parameters of the Explanatory Memorandum, despite the health issues Applicant B faced following the medical event. Whilst you did eventually move into the property once Applicant A's employment arrangements were established so that they could work locally, the delay in moving in was approximately X, which was a significant period of time. In addition, the property was also rented out until you eventually moved into the property.

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 as noted above the property was rented out continuously from when it was purchased until you eventually moved into the property in mid-20XX.

Whilst we acknowledge that the circumstances surrounding Applicant B's health issues were unforeseen, the fact remains that a mere intention to move into a dwelling and occupy it as your main residence is not enough to satisfy the conditions of the exemption.

The legislation does not allow you to treat the dwelling as your main residence from a particular date after purchasing the dwelling, unless you actually move in.

Whilst we acknowledge that your circumstances were very unfortunate, they go beyond the circumstances envisaged by the Explanatory Memorandum.

As such, section 118-135 of the ITAA 1997 will not apply because you did not move into the property as soon as practicable, along with the fact that the property was rented out continuously from when it was purchased until you eventually moved into the property. Due to this the dwelling will only be treated as your main residence for CGT purposes from the date you moved into it.