Edited version of private advice

Authorisation Number: 1051956321748

Date of advice: 1 March 2022

Ruling

Subject: CGT - main residence exemption

Question

Can 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 periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired your first property on in Month 20XX, with settlement occurring in Month 20XX (the property).

Prior to purchasing the property, you were temporarily residing in the holiday home of your parents, whilst waiting to purchase your first property.

The holiday home was fully furnished and as such you owned very little personal belongings and no furniture.

You viewed the holiday home as a temporary residence prior to buying your first home, and you had never accumulated your own furnishings for the house.

The dwelling was intended to use as your home from the date of settlement.

Gas and electricity and water were connected in joint names.

Immediately after settlement, you visited the property regularly, undertaking minor repairs and maintenance in preparation for the property becoming your home. In this period, you stayed in the property overnight on several occasions.

The dwelling was ideally located for you, close to your workplaces and both of you recognised the dwelling being your home.

After purchasing the property, you were offered a career opportunity which required you to move to a different city.

As a result of choosing to reside at the holiday home of your parents in preparation for the move for the career progression, the property was subsequently rented from July 20XX to help cover the mortgage repayments.

You have not purchased a second property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Reasons for decision

Subdivision 118-B of the ITAA 1997 provides an exemption for a capital gain or capital loss from certain CGT events that happen in relation to a taxpayer's main residence. The general rule is contained in section 118-110 of the ITAA 1997 which provides that a capital gain or loss that an individual makes from the disposal of a dwelling is disregarded if the dwelling was the individual's main residence throughout the period it was owned. This rule may be extended or limited by other provisions in Subdivision 118-B of the ITAA 1997.

Whether a dwelling is an individual's main residence depends on the facts of each case. Generally, a dwelling is considered to be your main residence if:

•                    you and your family live in it

•                    your personal belongings are in it

•                    it is the address your mail is delivered to

•                    it is your address on the electoral roll

•                    services such as gas and power are connected.

The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant.

To be your main residence, your property must have a dwelling on it and you must have lived in it. You are not entitled to the exemption for a vacant block.

Establishing your main residence

Section 118-135 extends the main residence exemption where the dwelling becomes the taxpayer's main residence by the time it was first practicable for the taxpayer to move into it after the taxpayer acquired his or her ownership interest in it. In this situation, the dwelling is treated as the taxpayer's main residence from the time it was acquired.

If the taxpayer does not move into the dwelling when it first becomes practicable to do so, the section does not apply to treat the dwelling as a main residence. This means that the dwelling will be the taxpayer's main residence from the time it actually became the main residence (rather than from the time of acquisition).

The phrase 'as soon as practicable' is not defined in the legislation. The Explanatory Memorandum (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 EM 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 Income tax: capital gains: how soon after the construction of a dwelling is finished must the dwelling become the main residence of a taxpayer to satisfy the conditions in paragraph 118-150(3)(a) of the Income Tax Assessment Act 1997? 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).

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

Based on the information you have presented; you have not established the property as your main residence.

You purchased the property with the intention of living in it as your main residence. Prior to purchasing the property, you were temporarily residing in the holiday home of your parents.

You explained that after settlement, you visited the property regularly, undertaking minor repairs and maintenance in preparation for the property becoming your home. In this period, you stayed in the dwelling overnight on several occasions. It is noted that the length of time between settlement and the time you commenced renting out the dwelling was less than two months. Although you had some belongings and had utilities connected at the property, you still resided at your family's holiday home residence.

After purchasing the dwelling, one of you were offered a career opportunity which required you to move to a different city.

You made the decision to reside at the holiday home of your parents in preparation for the move, the property was subsequently rented to help cover the mortgage repayments.

Conclusion

As you have not established the property as your main residence, section 118-135 of ITAA 1997 cannot not apply to treat the property as your main residence from the purchase date.