Edited version of private advice

Authorisation Number: 1052406040751

Date of advice: 16 June 2025

Ruling

Subject: CGT - main residence exemption

Question 1

Are you eligible for a full main residence exemption on the sale of Property A?

Answer

No

Question 2

Are you eligible for a partial main residence exemption on the sale of Property A?

Answer

Yes

Question 3

Are you eligible for the 50% capital gains tax (CGT) discount on the sale of Property A?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On Date one, you purchased a property (Property A).

You have 100% ownership of Property A.

Settlement of Property A occurred on Date two.

You purchased the property on the understanding that the tenants residing in Property A were on a periodic agreement, their lease having lapsed, and were able to be given notice to vacate immediately.

Property A was being managed by Person A of Company A.

On Date 3, you contacted Person A by phone and directed them to issue a notice to vacate to the tenants of the property. Person A confirmed that they would issue the notice to vacate the following day, Date 4.

They advised that you should be able to move into Property A from Date 5.

On Date 5, the tenants emailed Person A, advising that they had a confirmed lease until 20XX. However, when Person A requested they provide a copy of the lease, they were unable to do so.

On Date 6, you received a phone call from Person A informing you that they had verbally informed the tenants of your intention to move in as soon as possible. The tenants advised they would not be leaving as they believed they had a signed lease until Date 7.

On Date 6, you received an email from Person B, an agent for Company B, confirming that the lease was periodic.

You contacted your solicitor Person C. They contacted the sellers of Property A.

On Date 6, you received an email from Person C, confirming that the previous owners did not sign any lease renewals and that the lease ended in 20XX. From that time, the lease became periodic. Person C advised Person A to proceed with the Notice to Leave and communicate to the tenants the date they need to be vacated by.

On Date 6, you received another email from Person C, advising that Property A was previously managed by Company A. The email had a copy of the lease ending in early 20XX attached.

On Date 6, you received an email from Person A, advising that they had issued the Notice to Vacate to the tenants and that they would advise the tenants that as no lease was signed, they would need to vacate by a specified time on Date 8.

You were sent an email chain between Person A and the tenant from Date 4 to Date 9 in which the tenant objected to vacating Property A due to the affordability crisis. Person A confirmed with the tenant that you needed possession of Property A by Date 8.

On Date 10, you received numerous text messages from Person A stating that the tenant would confirm on Date 11 whether or not they intended on vacating Property A. You asked Person A to only communicate in writing from that point as you felt it was likely that the matter would proceed to the relevant tribunal.

In mid 20XX, you received a phone call from Person A informing you that the tenants did not wish to leave as it was their position that they had a lease until early 20XX. During this phone call, Person A said that they had spoken to the tenant multiple times over the phone about whether or not a valid lease was in place. During this phone call, Person A asked you if you would consider giving the tenant a lump sum of money to induce them to move out. You advised Person A that you would not consider doing that as you had not done anything wrong and whatever promises Company A had made to the tenant did not concern you. For this reason you requested that Property A cease being managed by Person A and the matter be escalated to Company A management.

From that point on, Property A was managed by Person D, the Area Manager of Company A.

On Date 8, the tenants vacated Property A.

Company A paid the tenant a lump sum of money for them to vacate Property A.

On Date 12, you moved into Property A.

The rental income that you earned from Property A between Date 13 and Date 14 was included in your income tax return for the income year ending on 30 June 20XX.

You will also include the rental income from Date 15 to Date 8 in your income tax return for the income year ending on 30 June 20XX.

You have purchased a property with your partner Person E (Property B).

You purchased Property B in early 20XX as joint tenants.

Property B requires significant renovation and you would like to sell Property A to assist in funding the renovations.

You and Person E are currently residing at Property B.

You and Person E have not lived together nor shared finances until the purchase of Property B.

You will sell Property A within the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Question 1

Summary

You will not receive a full main residence exemption on the sale of Property A.

Detailed reasoning

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

•         you are an individual,

•         the dwelling was your main residence throughout 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 extends the main residence exemption to take account of the time needed to move into a dwelling. It includes the period from when you acquire your main residence to when it was first practicable to move into the dwelling after it was acquired.

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

The concession in section 118-135 of the ITAA 1997 takes account of situations where, for example, there is a delay in moving in because of illness or other reasonable cause.

'First practicable' is not defined in the legislation and takes its ordinary meaning. However, Chapter 2.12 of the Explanatory Memorandum to the Tax Law Improvement Bill (No.1) 1998 explicitly states that the concession in section 118-135 does not extend to cases where an individual is unable to move into the dwelling because it is being rented out.

In the case of Chapman v FC of T (2008 ATC 10-029), the taxpayer was only eligible for a partial exemption as he did not move in as soon as practicable.

Regarding intention to occupy, as outlined in Couch v FC of T (2009 ATC 10-072), the intention to occupy is not sufficient to obtain the exemption.

Application to your circumstances

In your case, you purchased Property A with the intention of it being your main residence; however, it was already rented to tenants from when settlement for the purchase took place on Date 2. As a result, you only occupied Property A from Date 12.

Whilst we acknowledge that you could not move into Property A while it was tenanted, your circumstances don't meet the required threshold in section 118-135 of the ITAA 1997 to allow you to treat the property as your main residence from when you acquired it.

The reasons for your delay for moving into the property unfortunately go beyond the temporary circumstances envisaged by the Explanatory Memorandum as intended by the Australian Parliament.

Consequently, section 118-135 of the ITAA 1997 will not apply to you because you did not move into the property as soon as practicable. Therefore, the dwelling can only be treated as your main residence for CGT purposes from the date you occupied it.

Question 2

Summary

You will receive a partial main residence exemption on sale of Property B.

Detailed reasoning

Subsection 118-185(1) of the ITAA 1997 provides that you will receive a partial exemption 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

You calculate your capital gain or capital loss using the formula:

CG or CL amount x non-main residence days

days in your ownership period

where:

CG or CL amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

non-main residence days is the number of days in your ownership period when the dwelling was not your main residence

Application to your circumstances

You entered into a contract to purchase Property A on Date one. However, you were not able to move into Property A until Date 12.

As a result, you cannot treat the days in your ownership period before you actually moved into Property A as main-residence days Therefore, you will receive a partial main residence exemption on disposal of Property A.

You calculate your capital gain or loss using the formula outlined in section 118-185 of the ITAA 1997.

Question 3

Summary

You are eligible for the 50% CGT discount on the sale of Property A.

Detailed reasoning

You are entitled to a 50% CGT discount if a CGT event happens to a CGT asset that you acquired at least 12 months before the CGT event.

You acquire a CGT asset on the date the contract is entered into. If there is no contract, you acquire the asset on the date that the entity disposes of the asset stops being its owner.

Application to your circumstances

You entered into a contract to purchase Property A on Date one. On the sale of Property A, CGT event A1 will occur.

As you have already owned Property A for at least 12 months, you will be eligible for a 50% CGT discount on the sale of Property A.