Edited version of private advice

Authorisation Number: 1051932471885

Date of advice: 4 February 2022

Ruling

Subject: CGT - main residence exemption

Question 1

Are you entitled to the full main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 on the sale of the property?

Answer

No.

Question 2

Are you entitled to a partial main residence exemption in section 118-185 of the Income Tax Assessment Act 1997 on the sale of the property?

Answer

Yes.

This ruling applies for the following period:

Year ended DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

On DDMMYYYY you exchanged a contract to purchase an off the plan new apartment.

Your intention was to move into the apartment and live there as your main residence once construction was completed in 20XX.

The land on which the dwelling is situated is less than 2 hectares.

On DDMMYYYY, your parent was diagnosed with a terminal medical condition.

Due to the family illness, you remained living in your family home in order to provide care and assistance to your parent, rather than moving into the new apartment as intended.

On DDMMYYYY settlement occurred and you took possession of the new property.

At the end of the 20XX-XX financial year, you allowed tenants to move into the new property which first earned rental income from DDMMYYYY as per the income tax return you lodged.

On DDMMYYYY you first moved into the property after the tenants had vacated.

Due to your family circumstances, you believe you have moved in as soon as practicable after acquisition and you have always considered the property to be your main residence as you do not own any other investment properties.

During the 20XX-XX financial year you sold the property and settlement occurred on DDMMYYYY.

You provided a letter from your parent's doctor explaining their terminal medical condition.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-185

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

Income Tax Assessment Act 1997 section 118-190

Reasons for decision

Summary

It is considered that you did not move into the new dwelling 'when it was first practicable to do so' within the meaning of section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) and the circumstances of temporary delays envisaged by the Explanatory Memorandum as intended by the Australian Parliament. Therefore, you are entitled to only a partial main residence exemption for any capital gain or capital loss made on the disposal of the dwelling.

Detailed reasoning

Main residence exemption

Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss if and only if a CGT event happens. The most common CGT event, CGT event A1, occurs when you dispose of a CGT asset to someone else. For example, if you sell a property, land and dwellings are CGT assets. The time of the event is when you enter into the contract for the disposal (section 104-10 of the ITAA 1997).

Subdivision 118-B of the ITAA 1997 determines the extent to which any capital gain or loss is ignored when a CGT event happens to your dwelling. Section 118-110 of the ITAA 1997 disregards a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling, if you are an individual, the dwelling was your main residence throughout your ownership period, and where the interest did not pass to you from the estate of a deceased person.

However, under section 118-190 of the ITAA 1997 you may make a capital gain or capital loss if the dwelling was used for the purpose of producing assessable income.

A partial exemption is available for a CGT event that happens to a CGT asset that is a dwelling, where the dwelling was your main residence for only part of your total ownership period (section 118-185 of the ITAA 1997).

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.

The Explanatory Memorandum to the Tax Law Improvement Bill (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. This then considers situations where, for example, there is a temporary 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 to tenants.

Whether the dwelling becomes the taxpayer's sole or principal residence as soon as practicable after erection or completion, depends on the facts of each case. The personal circumstances of the taxpayer may be relevant in limited cases only (Taxation Determination TD 92/147 Income tax: capital gains). The types of situations envisaged in TD 92/147 are for example, where immediate repairs to the dwelling are needed to be carried out, or your current employer gave you a temporary work assignment in a different location for a very short period of time such as 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 not sufficient to obtain the main residence exemption (Couch and Commissioner of Taxation [2009] AATA 41) (Couch's case).

Section 118-135 of the ITAA 1997 was held to not 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 Administrative Appeals Tribunal (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.

In Chapman and Commissioner of Taxation [2008] AATA 421 (Chapman's case), the taxpayer purchased a property in June 2001 but, because they worked in another city and for financial reasons, the property was rented out until they took up residence in September 2003. The 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".

A similar decision was held in Caller and Commissioner of Taxation [2009] AATA 890 (Caller'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 income was being derived could not qualify for the main residence exemption. It was affirmed that the Couch and Chapman cases were correctly decided.

Application to your circumstances

In your case, you purchased a new property with the intention of it being your main residence however the dwelling was rented to tenants for the entire time that you did not live in the property between 20XX and 20XX.

Whilst we acknowledge that the circumstances surrounding your parent's health issues were unforeseen and difficult for your family, the fact remains that a mere intention to move into a dwelling and occupy it as your main residence is not enough to qualify the conditions of the exemption to invoke section 118-135 of the ITAA 1997 and treat the dwelling as your main residence from when you acquired it in 20XX.

The legislation does not allow you to treat the dwelling as your main residence unless you actually move in and reside in the property. The reasons for your extended delay for moving into the property go well beyond the temporary circumstances envisaged by the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 as intended by the Australian Parliament.

As such, section 118-135 of the ITAA 1997 will not apply to you because you did not move into the property as soon as practicable. Due to this the dwelling can only be treated as your main residence for CGT purposes from the date you moved in on XX May 20XX.

You will need to apportion any capital gain made on the disposal of the dwelling in accordance with subsection 118-185(2) of the ITAA 1997. The main residence exemption is not available prior to you first occupying the dwelling in 2017 as your main residence for CGT purposes.

Partial main residence exemption

Use the following formula to calculate the taxable portion of your capital gain or loss when where the dwelling was your main residence for only part of your entire ownership period:

Capital gain or loss x Non-main residence days

Days in your ownership period

Step 1: Calculate your capital gain or loss from selling or disposing of the property.

Step 2: Multiply the amount at step 1 by the number of non-main residence days.

Step 3: Divide the amount at step 2 by the total days in your ownership period.

The capital gain or loss 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 on XX May 20XX until the day before you moved into the dwelling on XX May 20XX.

Days in your ownership period will be the total days from the date of settlement of the contract of purchase of the dwelling on XX May 20XX until the date of settlement of the contract of sale when the dwelling was sold on XX April 20XX.

To confirm the taxable portion of your capital gain or loss you can also use the CGT property exemption tool on ato.gov.au by searching for quick code QC 18138.