Edited version of private advice

Authorisation Number: 1052262020002

Date of advice: 14 June 2024

Ruling

Subject: CGT - absence rule

Question 1

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

Answer

No.

Question 2

If the answer to question 1 is yes, can you make an absence choice for your rental property if the granny flat continues to be rented throughout the time the property becomes your main residence?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In XX 20XX, you purchased a property (the Property).

The Property was rented or made available or rent from the date of purchase.

The Property has a main house and granny flat, which are rented separately.

There were existing tenants when you acquired the Property in both the main house and the granny flat.

Due to health reasons, you have never lived in the Property.

It was necessary for you to live in a different locality, to attend nearby medical assistance.

On XX XX 20XX, you intend to move into the Property and establish it as your main residence.

The granny flat will continue to be rented and earn assessable income when you move into the main dwelling.

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 118-110

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 pursuant to section 102-20 of the ITAA 1997.

Section 104-10 of the ITAA 1997, states that a CGT event A1 will occur when you sell your ownership interest in a property.

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 in accordance with 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 taxpayer's 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.

Under section 118-185 of the ITAA 1997, a partial exemption is available for a CGT event that happens in relation to a dwelling, or your ownership interest in it, if:

•         You are an individual; and

•         The dwelling was your main residence for part only of your ownership period; and

•         The interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Section 118-135 of the ITAA 1997 also applies to the partial exemption and provides that 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. To be considered your main residence, you must have moved into the property at the time it was first practicable after you acquired your ownership interest.

Section 118-145 of the ITAA 1997 provides that once a dwelling has been established as your main residence, you may continue to treat the dwelling as your main residence during periods of absence. When the dwelling is left vacant, you may be able to 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 being rented, the maximum 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.

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to satisfy that you have established the property as your main residence and get the exemption.

Application to your circumstances

To be eligible to elect to apply the absence rule to your property, you must establish the dwelling as your main residence prior to first using it for the purpose of producing assessable income. You are required to have moved into the property and established it as your main residence to be eligible for the CGT exemption.

Section 118-145 of the ITAA 1997 does not apply to your circumstances as the property was not established as your main residence prior to first using it to produce assessable income. We have taken into account the following facts when determining whether you established the property as your main residence:

•         You have never moved into the property.

•         You have never moved your belongings into the property.

•         The property was never used as your main address or updated to reflect this address on the Electoral Roll.

•         Your stated intention was to occupy and reside in the dwelling, however

•         From the date of acquisition in April 2021, the property has always been used as an investment property.

Given you have never lived in the property, the intention to occupy the dwelling as your main residence, without actually doing so does not allow you to use the absence choice under section 118-145 of the ITAA 1997.

The Commissioner understands that there were circumstances which influenced your decision to continue to rent the property, however the facts are that you did not live in the property as your main residence from the date you purchased the property.

In Couch & Anor v Federal Commissioner of Taxation [2009] AATA 41 at paragraph 14, the Tribunal confirmed that the 'mere intention to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption.'

Your property was tenanted from the date of purchase. Immediately using the dwelling as an investment disqualifies you from eligibility to apply the CGT 6-year absence rule and as a result, you are not eligible to make the absence choice under section 118-145 of the ITAA 1997. You are eligible to claim the 50% discount as you have owned the property for more than 12 months.