Private ruling: CGT - main residence exemption
Date of advice: 1 March 2017
Published: August 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will there be any capital gains tax (CGT) consequences for the sale of a jointly owned property? | A1: Yes.

Relevant facts and circumstances: A taxpayer and others purchase a residential property (the Property) in 19XX. A taxpayer and the others are named on the title deed of the property. The others moved in to the property as soon as practicable. The taxpayer did not move into the property until 20XX and lived there until 20XX. The taxpayer then lived in the property again from 20XX to 20XX. The taxpayer lived elsewhere from 20XX to 20XX. When they moved overseas, the taxpayer stopped servicing the mortgage and verbally agreed with the others that they would not share in the profits from the sale of the Property. The Property was never used to produce assessable income. The taxpayer has never owned another property in Australia. The taxpayer's name has not yet been removed from the title deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Conveyancing Act 1919 Section 23C | Conveyancing Act 1919 Section 23C(a) | Conveyancing Act 1919 Section 23C(c) | Income Tax Assessment Act 1997 Subdivision 118B | 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 118-185

Reasons for decision: Detailed Reasoning - Capital gains tax: A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). The most common event is CGT event A1 which happens under section 104-10 of the ITAA 1997 when a person disposes of a CGT asset to someone else. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. | Detailed Reasoning - Ownership interest: You acquire your ownership interest in real property upon settlement and registration. Every State in Australia has a provision that all interests in land must be recorded in writing. In New South Wales (NSW), paragraph 23C(1)(a) of the Conveyancing Act 1919 (the Conveyancing Act) provides that no interest in land can be created or disposed of, except by in writing and signed by the person or their agent, or by operation of law. Subsection 23C(c) of the Conveyancing Act provides that disposition of an equitable interest must also be recorded in writing. In your circumstances, you acquired your ownership interest in the Property at settlement in 19XX when the title was registered with your name on it. Your name has never been removed from the title; therefore you still have an ownership interest in the Property. There is no evidence that your beneficial interest in the property (that is your right to a share of the profits equal to your ownership interest at disposal) has been disposed to your Parents in writing. | Detailed Reasoning - When a dwelling becomes your main residence: Subdivision 118B of the Income Tax Assessment Act 1997 ( ITAA 1997) provides that a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence, can be ignored. Section 118-100 of the ITAA 1997 provides that this exemption does not apply in full if: ● it was your main residence during part only of your ownership period; or ● it was used for the purpose of producing assessable income. Section 118-135 of the ITAA 1997 provides that if you move in as soon as practicable after acquiring your ownership interest, then the dwelling is treated as your main residence from when the interest is acquired until it actually became your main residence. The Commissioner's view of the phrase “as soon as practicable” is presented in Tax Determination 92/147. As soon as practicable means that, unless there are unforeseen circumstances, or events happen beyond your control you must move into the dwelling as soon as possible. This view is reinforced in the case of Chapman v Federal Commissioner of Taxation [2008] AATA 421 ( Chapman's case ). In Chapman's case , the taxpayer purchased a property in Perth in June 2001 and continued to work in Kalgoorlie. During the first 6 months that the taxpayer worked in Kalgoorlie, the dwelling was rented to the vendors. At the end of the 6 months, the taxpayer rented the dwelling out to another party. In this case, the Commissioner deemed that the dwelling became the taxpayer's main residence on 23 September 2003 and this fact was not disputed. The taxpayer submitted that his intention upon purchase was to move into the property, but was unable to do so owing to work commitments and financial constraints. The Commissioner determined that the taxpayer had not met the conditions of section 118-135 of the ITAA 1997. The tribunal stated that the determination of the Commissioner was affirmed and that the “time it was first practicable” should not be read to mean “the time it was first convenient”. Where section 118-135 of the ITAA 1997 does not apply because the taxpayer does not move into a residence as soon as practicable, the residence will only be treated as their main residence for CGT purposes from the date they actually move into the dwelling. In your circumstances, settlement of the property occurred in 19XX and you did not move in until 20XX. Therefore, you did not move into the Property as soon as practicable, so you are not entitled to a full CGT concession for the Property being your main residence for the entirety of your ownership period. | Detailed Reasoning - Absence rule: Section 118-145 of the ITAA1997 provides that if a dwelling was your main residence, you may continue to treat it as your main residence. If you use your main residence to produce assessable income, the maximum that you can treat it as your main residence is six years. The six years will restart if you have moved back into the dwelling and then moved back out again. If you make the choice to treat the dwelling as your main residence whilst you are absent, you may not treat any other dwellings as your main residence whilst you choose to use the absence exemption in section 118-145 of the ITAA 1997. If the dwelling is not used for the purpose of producing assessable income, it may be treated as your main residence under section 118-145 of the ITAA 1997 indefinitely. In your circumstances, you were absent from the Property between 20XX and 20XX; 20XX and 20XX; and 20XX and 20XX. At no time was the Property used to produce assessable income, therefore you are entitled to treat the Property as your main residence, provided you have not treated any other property as your main residence during the above periods of absence. | Detailed Reasoning - Partial main residence exemption: Section 118-185 of the ITAA 1997 provides that you can apportion the number of days that a dwelling was not your main residence against the number of days in total that you owned it, provided a few conditions are met. The conditions imposed in subsection 118-110(1) of the ITAA 1997 are that you must be an individual, the dwelling was your main residence through the ownership period and the interest did not pass to you as beneficiary of an estate. The formula is provided in subsection 118-185(2) of the ITAA 1997 and is as follows: ● CG or CL amount x (Non-main residence days/days in your ownership period) The example provided in section 118-185 of the ITAA 1997 is that: A taxpayer buys a house in July 1990 and moved in immediately. In July 1993, they moved out and began to rent it. They then sold the property in June 2000, making a capital gain of $10,000.00. They chose to continue to treat the dwelling as their main residence under section 118-145 of the ITAA 1997 for the first 6 of the 7 years that the residence was rented out. Under this section, you will be taken to have made a capital gain of: $10,000.00 x (365/3650) = $1,000.00. In your circumstances, you purchased the property in 19XX and moved into it in 20XX. At the time you moved into the Property, it became your main residence. You are therefore entitled to a partial exemption for the property being your main residence from the time that you moved in and it became your main residence. Because you did not move into the Property as soon as was practicable, your non-main residence days will be from the date you acquired your ownership interest (settlement of the Property), until you moved in and it became your main residence.