Edited version of private advice

Authorisation Number: 1052268050833

Date of advice: 3 July 2024

Ruling

Subject:Main residence exemption

Question 1

Will section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) treat the new Property as the main residence of the Taxpayer from date of the CGT event?

Answer

No.

Question 2

Will section 118-140 of the ITAA 1997 treat both the former main residence (old Property) and the new Property as the main residences of the Taxpayer between XX/XX/XXXX and XX/XX/XXXX?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June XXXX

The scheme commenced on:

XX/XX/XXXX

Relevant facts and circumstances

The Taxpayer decided to move to another State to help manage their medical condition.

The Taxpayer was the registered owner of the old Property from XX/XX/XXXX to XX/XX/XXXX.

On XX/XX/XXXX, the Taxpayer entered a contract to purchase the new Property in another State, subject to the sale of the old Property.

On XX/XX/XXX, the State in which the new Property is located closed its borders to all other Australian States and Territories in response to COVID-19 pandemic.

On XX/XX/XXX, the Taxpayer entered a contract to sell the old Property.

On XX/XX/XXX, the Taxpayer secured the lease of a property for 12 months to provide accommodation following the sale of the Taxpayer's old Property.

On XX/XX/XXX, the State where the new Property is located opened its borders to people from all States and Territories.

On XX/XX/XXX, the State in which the old Property is located was declared a COVID-19 hotspot and all residents were banned from entering the other State.

On XX/XX/XXXX, the Taxpayer was advised that no insurance policy would cover the new Property if it remained unoccupied for more than 90 days.

On XX/XX/XXXX, settlement of the old Property was completed. The Taxpayer's furniture was stored at storage facility in that State and the removalists would require a notice period to make arrangements to transport the Taxpayer's furniture to the other State.

On XX/XX/XXXX, settlement of the new Property was completed.

On XX/XX/XXXX, the new Property was leased for a period of 12 months to allow this property to be insured. A property agent advised the minimum lease period that would be acceptable for prospective tenants was 12 months, not 6 months, given it was unfurnished.

On XX/XX/XXXX, the State in which the new Property is located announced that it will reopen it border to residents of the old Property, except for residents where the Taxpayer was residing which remained a COVID hotspot. On XX/XX/XXXX, this restriction was lifted and there was no need for a State Border Pass to be obtained to gain entry into this State.

Further lockdowns and border closures happened between both States.

The Taxpayer applied for a State Border Pass on several instances starting just before the lease on the new Property expired and in each instance the application was refused.

On XX/XX/XXXX, the lease on the new Property expired and the tenant moved out.

On XX/XX/XXXX, the Taxpayer was granted a State Border Pass, subject to the Taxpayer completing 14 days hotel quarantine.

On XX/XX/XXXX, the Taxpayer began residing at the new Property after completing the hotel quarantine requirements.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 subsection 118-140(1)

Reasons for decision

All legislative references are to the ITAA 1997, unless otherwise stated.

Question 1

Will section 118-135 treat the new Property as the main residence of the Taxpayer from date of the CGT event?

Summary

The Property will only be taken to be the Taxpayer's main residence from when they took up residence, as they did not move into that property when it was first practicable to do so.

Detailed reasoning

Section 118-135 states:

If a *dwelling becomes your main residence by the time it was first practicable for you to move into it after you *acquired your *ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence.

Section 118-135 was introduced to extend 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. Accordingly, the Taxpayer is taken to have an ownership interest in the new Property from DD August 20YY.

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

The word 'practicable' is defined in the Macquarie Dictionary to mean:

1.            capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible.

2.            capable of being used or traversed, or admitting of passage

The Explanatory Memorandum to Tax Law Improvement (No.1) Bill 1998(EM)that introduced section 118-135 states:

Change

Extend the main residence exemption to take account of the time needed to move into a dwelling, ie. from acquisition until it is first practicable for the individual to move into the dwelling that becomes your main residence.

Explanation

The rewritten provision takes account of situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

The exemption does not extend to cases where an individual is unable to move into the dwelling because it is being rented out. However, it would cover a period after the end of the tenancy if the owner could not take up residence immediately because of the nature of repairs required to the dwelling.

Accordingly, section 118-135 applies in circumstances where a taxpayer is unable to move in due to illness or other reasonable cause outside the taxpayer's control. and does not apply because the dwelling is subject to a lease or where it is merely 'inconvenient' to do so.

In Chapman v FC of T (2008) 71 ATR 689, 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 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.

A similar result was achieved in Caller & Anor v FC of T 2009 ATC where the husband and wife 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 exemption.

The Taxpayer was not able to take up residence of the new Property after settlement occurred due to the residents of that State being prohibited from entering the other State at the time due to border restrictions because of the COVID-19 pandemic.

The Taxpayer did not take up residence of the new Property, even though they were at times allowed to enter that State, for the following reasons:

•         the uncertainty of when the Taxpayer would be able to move to the new Property due to the COVID-19 pandemic border restrictions

•         being advised to obtain insurance, the new Property could not be unoccupied for more than 90 days, resulting in the Taxpayer entering into a 12 month lease, shortly after the new Property was acquired.

•         a 12 month lease was entered into, as a property manager advised a 6 month lease would not be acceptable to prospective tenants due to it being unfurnished.

•         the Taxpayer's furniture from the old Property was in storage in that State, which required a period of notice to be given to allow a removalist time to make all the necessary arrangements to have the furniture transported to the other State.

•         the Taxpayer was residing in leased premises in the State where the old Property was located, which did not expire until XX/XX/XXXX.

•         the new Property was not available for the Taxpayer to move into due to it being leased.

•         the Taxpayer only began seeking entry into the other State shortly before the lease on the new Property was to expire, as evidenced by applying for a State Border Pass from XX/XX/XXX.

The Taxpayer decided to move to the other State to help manage their health. To be able to make the move, required buying a house in the other State, subject to the sale of the old Property. A contract to purchase the new Property was entered on XX/XX/XXXX and a contract to sell the old Property happened on XX/XX/XXXX.

Whilst both States went into lockdown and border closures intermittently during the period under consideration, the Taxpayer entered into a 12 month lease for a property on XX/XX/XXXX in the State where the old Property was located and into a 12 month lease for the new Property on XX/XX/XXXX. Settlement of the old Property happened on XX/XX/XXXX and for the new Property on XX/XX/XXXX.

From the information provided, the requirement in section 118-135 has not been satisfied, as the Taxpayer did not move into the new Property when it was first practicable after they acquired an ownership interest for the new Property on XX/XX/XXXX. Whilst it is appreciated that both States opened and closed their borders during the period under consideration, the Taxpayer entered into 12 month leases in both States that would not have permitted the Taxpayer to move into the new Property when it was first practicable. That is, from the time the new Property was leased it was not available to the Taxpayer to take up residence, even if the Taxpayer was able to travel to the other State during the period it was leased.

The words 'the time it was first practicable' should not be read down to mean 'the time it was first convenient.'[1] The words 'practicable' and 'possible' are not synonymous and it is necessary to consider the meaning to be attributed to the word 'practicable' in the context of the legislation in which it appears. Whilst the particular circumstances of the Taxpayer are relevant when considering whether section

118-135 applies, the EM makes it clear that a period when the property is let out and during which rental income is being derived cannot qualify for the main place of residence exemption.[2]

The new Property will only be treated as the Taxpayer's main residence from the date they began residing in the new Property.

Question 2

Will section 118-140 treat both the old Property and new Property as main residences of the Taxpayer between XX/XX/XXXX and XX/XX/XXXX?

Summary

Subsection 118-140(1) will not apply to treat both the old Property and the new Property as the main residences of the Taxpayer between XX/XX/XXXX and XX/XX/XXXX.

Detailed reasoning

Subsection 118-140(1) states:

If you *acquire an *ownership interest in a *dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

(a)          6 months ending when your ownership interest in your existing main residence ends; or

(b)          the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends.

This provision only applies if you have 2 main residences during a certain period.

The Taxpayer entered a contract to sell their old Property on XX/XX/XXXX, which settled on XX/XX/XXXX and therefore ceased to be the Taxpayer's main residence on this date.

A contract to purchase the new Property was entered into on XX/XX/XXXX, which settled on XX/XX/XXXX. For the reasons provided in Question 1, the new Property did not commence to be the main residence of the Taxpayer until they began residing in that property.

Accordingly, due to the dates involved, neither of the requirements in subsection 118-140(1) have been met. Therefore, the Taxpayer is not entitled to treat both properties as their main residences between XX/XX/XXXX and XX/XX/XXXX.

[1] Chapman v FC of T (2008) 71 ATR 689); Re Couch v FCT 74 ATR 724

[2] Re Caller and Another v FCT 77 ATR 975