Edited version of private advice

Authorisation Number: 1052410479320

Date of advice: 18 June 2025

Ruling

Subject: Capital gains tax

Question 1

Does 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 1

No.

Question 2

Are you able to use the absence rule to treat the property as your main residence for the period it was rented out?

Answer 2

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse purchased the property, and settlement occurred a number of months later.

It was your intention for the property to be your main residence.

The reason for the extended settlement was as follows:

•                as non-residents at the time of purchase, you were not eligible for traditional home loans in Australia. You required time to consolidate their personal savings and arrange international transfers to meet the purchase requirements.

•                The extended period would have allowed for adequate time to organise your departure from Country Z, including the shipment of household goods and the closing of personal and professional affairs.

•                The sellers of the property agreed a longer settlement period due to their own complex situation involving a family separation and the need to accommodate a child with a disability. This mutual agreement on an extended settlement was beneficial to both parties.

You and your spouse were living in Country Z at the time of the purchase.

You made enquiries regarding the schooling of your children in Australia along with getting estimates of shipping your belongings to Australia.

It was your intention to move to Australia and move into the property.

You are a Country Z citizen, and your spouse is a Country Y citizen.

You were initially going to enter Australia on your spouse's visa.

You were able to apply for your own visa due to the pandemic delaying the move.

Covid prevented you from entering Australia as planned.

You rented the property out.

You felt it was your community duty to make the property available for rent during the pandemic and you needed to pay the mortgage on the property.

The lease agreement for the property was as follows:

•                The tenants and managing agent were informed of your intention to occupy the home as soon as international travel and relocation were feasible.

•                The lease included an element of flexibility and communication with the agent, as you could not provide a precise arrival date due to ongoing uncertainty with Australian border policies and international travel logistics.

You and your family moved into the property and commenced treating it as your main residence when you arrived in Australia.

You were not able to come to Australia any earlier for the following reasons:

•                The Country Z school year runs differently than in Australia. It was important for the children to complete their school year in Country Z to avoid educational disruption. Moving later also allowed for enrolment in Australian schools at the beginning of the Term, aiding a smooth transition into the Australian school system.

•                Although restrictions began easing, there was still a lot of uncertainty, and you were extremely cautious not to become stuck between homes with any 'new' outbreak. You were extremely cautious about travel regulations, vaccine requirements, and regulatory changes that could impact your move.

•                You were required to complete your professional obligations before relocating to Australia.

•                Your spouse's professional obligations also required time to handover projects responsibly.

•                Your shipping container was originally scheduled to arrive earlier in the year, and did not arrive in Australia until later in the year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Reasons for decision

You make a capital gain or loss because of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss.

You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it.

You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it.

Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate.

CGT main residence

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

Whether a dwelling is your main residence depends on the actions of you and your family. Generally, a dwelling is 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.

In 1998, section 118-135 was introduced into the ITAA 1997 which extends 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.

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.

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

However, the Explanatory Memorandum (EM) accompanying the introduction of section 118-135 (The 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 Explanatory Memorandum 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 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).

However, it would not apply where a taxpayer is unable to move in because the dwelling is subject to a lease or where it is merely "inconvenient" to do so (Chapman v FC of T (2008) 71 ATR 689) (Chapman's case).

In Chapman's case, the taxpayer purchased a property in Perth in June 20XX, but because he worked in Kalgoorlie and for financial reasons, the property was rented out until he took up residence in September 20XX. 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 20XX 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 20XX, 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 20XX but, as the husband had been transferred XX kms away for work, they leased it to a tenant until April 20XX when they took occupation of it. They subsequently sold it in 20XX 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.

The Absence rule in section 118-145 of the ITAA 1997 allows a taxpayer to continue to treat a property as their main residence when they move out of it and rent it out for up to X years as long as for the same period they are not treating another property as their main residence.

Application to your circumstances

You and your spouse were living in Country Z when you signed the contract for the property.

You had an extended settlement.

The Covid pandemic restricted movements in and out of Australia for non-citizens of Australia.

Both you and your spouse were non-citizens of Australia.

You decided to rent the property out as you felt it was your community duty to make the property available for rent and you also needed the income to pay the mortgage on the property.

You and your family did not arrive in Australia and move into the property until a later year despite restrictions being eased prior to that time.

You chose not to come to Australia due to your children's schooling, your job and your spouse's job requiring them to do a hand over along with your hesitancy relating to vaccination requirements and travel requirements.

Based on your circumstances we do not consider that you moved into the dwelling as soon as practicable.

The Explanatory Memorandum explains that 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 follows that 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.

However, the Explanatory Memorandum makes it clear that a period when the property is rented out and during which rental income is being derived cannot qualify. This principle was also clearly outlined in Couch's Case, Chapman's case and Caller and Anor's case.

We do not consider that your circumstances fit within the parameters of the Explanatory Memorandum.

Whilst you did eventually move into the property once you and your family arrived in Australia you did choose to delay your entry to Australia for some several months due to schooling and work commitments.

In addition to this you rented the property out for a period of time.

Your circumstances are considered comparable to the taxpayer in Chapman's case, in that you did not move into the dwelling when it was first practicable to do so. There was a significant delay from when you acquired your ownership interest in the dwelling, to when you moved into the dwelling, and as noted above the property was rented out for a significant period of your ownership.

The legislation does not allow you to treat the dwelling as your main residence from a particular date after purchasing the dwelling, unless you actually move in.

Your circumstances go beyond the circumstances envisaged by the Explanatory Memorandum.

Section 118-135 of the ITAA 1997 will not apply because you did not move into the property as soon as practicable, along with the fact that the property was rented out for a significant period of your ownership.

Due to this the dwelling will only be treated as your main residence for CGT purposes from the date you moved into it.

The Absence Rule will not apply to the relevant period as the property had not been your main residence prior to it being rented.