Edited version of private advice

Authorisation Number: 1052229025561

Date of advice: 5 March 2024

Ruling

Subject: CGT Main residence exemption

Question

Are you able to make an absence choice for your property under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

You purchased a property on XX XXXX 20YY.

The property was your first and only property purchase.

Your mortgage brokers organised the loan for the property as an investment home loan.

You paid stamp duty of $XX, XXX for the purchase of the property.

The property was purchased with tenants occupying the property on a month-to-month contract and were expecting to vacate within XX months.

The tenants vacated the property shortly after settlement, despite their lease remaining in place until XX XXXX 20YY.

The size of the land on which the dwelling stands is XXX square metres.

Your friends and family assisted you with the move into the property on XX XXXX 20YY.

You connected electricity and gas to the property via an energy supplier from XX XXXX 20YY.

Your initial intention was to live in the property.

You moved most of your personal belongings into the property.

You retained some possessions at your parent's residence for security purposes.

You decided to move back to your parent's place based on the following reasons:

•         The suburb's train station had infrequent train services and was constantly down in 20YY.

•         The main road into the city was a single-lane drive which impacted your ability to drive to work.

On XX XXXX 20YY, you contacted a real estate agent to manage your property. An advertisement for the property was created on the same day, although there was considerable interest in the property.

You moved back in with your parents on XX XXXX 20YY.

A rental agreement was dated on XX XXXX 20YY and the new tenants moved in on XX XXXX 20YY.

Your property was rented out under a lease agreement and produced assessable income from XX XXXX 20YY to XX XXXX 20YY.

You moved back into the property on XX XXXX 20YY and resided in the property until XX XXXX 20YY.

You were able to switch the loan from an investment loan to a homeowner loan in 20YY.

You signed a contract for the sale of the property on XX XXXX 20YY and settlement was effectuated on XX XXXX 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-100

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the ITAA 1997).

CGT event A1 will happen when you sell your ownership interest in a property (section 104-10 of the ITAA 1997).

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (section 118-110 of the ITAA 1997). To obtain the full exemption:

•         The dwelling must have been your home for the whole period you owned it;

•         You must not have used the dwelling to produce assessable income; and

•         Any land on which the dwelling is situated must be 2 hectares or less.

Section 118-135 of the ITAA 1997 provides that if the dwelling is moved into as soon as is practicable after the ownership interest was acquired, the dwelling is treated as the individual's main residence since the time that the ownership interest was acquired. However, the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 (the Explanatory Memorandum) explains that section 118-135 of the ITAA 1997 is not extended to the situation where an individual who acquires an ownership interest in a property is unable to move into the dwelling because it is being rented out.

Whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to:

•         the length of time the taxpayer has lived in the dwelling

•         the place of residence of the taxpayers' family

•         whether the taxpayer has moved his or her personal belongings into the dwelling

•         the address to which the taxpayer has his or her mail delivered

•         the taxpayers address on the Electoral Roll

•         the connection of services such as telephone, gas and electricity

•         the taxpayers' intention in occupying the dwelling

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

Section 118-145 of the ITAA 1997 provides that once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence during periods of absence. When the dwelling is left vacant, you may continue to treat the dwelling as your main residence for an indefinite period. When you choose to do this, you are making an absence choice.

Where the dwelling is rented, the maximum period that you may continue to treat the dwelling as your main residence is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence. The Commissioner does not have any discretion to extend the six year period.

Where you are not entitled to a full exemption, you may still be able to obtain a partial main residence exemption.

Section 118-185 of the ITAA 1997 also provides that only a partial main residence exemption is available where a dwelling is the main residence of an individual for only part of their period of ownership, subject to the application of absence provisions contained in sections 118-145 and 118-150 of the ITAA 1997.

Application to your circumstances

Section 118-135 of the ITAA 1997 does not apply to your circumstances as the property was rented out prior to you moving into the property. Furthermore, we have taken the following facts into consideration in determining whether you established the property as a main residence during the 20YY-YY income year:

•         You moved into the property for a period of X weeks

•         You moved most of your personal belongings into the dwelling

•         Your address was not updated to reflect the new address

•         Your address was not updated with the Electoral Roll

•         You connected electricity, gas and water to the property

•         Your stated intention was to occupy and reside in the property

•         The property was initially treated as an investment property

•         A new tenancy agreement was signed a day after you moved back into your parent's property

We have considered the following facts as favourable considerations:

•         You physically moved into the property

•         You connected electricity, gas and water

•         You moved your personal belongings

•         Your stated intention was to live in the property

The following facts are unfavourable considerations:

•         The property was initially treated as investment property

•         The period of stay in the property was transient

•         You did not update your mailing address

•         You did not update your electoral address

•         A new tenancy agreement was signed a day after you moved back into your parent's property

Based on these considerations, the property does not qualify as a main residence from XX XXXX 20YY to XX XXXX 20YY. The occupation of the property was of a transient, temporary or passing nature that is not sufficient to qualify as a main residence. We also consider that your subjective intention to occupy the property is outweighed by the observable factors displaying the intent for the investment purpose of the property.

As the property did not qualify as your main residence, you are not eligible to make an absence choice under section 118-145 of the ITAA 1997. However, you are eligible to claim a partial exemption for the period which you resided in the property as your main residence from XX XXXX 20YY to the date of settlement on XX XXXX 20YY. You may also claim the 50% discount as you owned the property for more than 12 months.