Private ruling: Capital gains tax - Main residence exemption
Date of advice: 20 November 2015
Published: January 2016
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you eligible for a full main residence exemption? | A1: Yes

Relevant facts and circumstances: You purchased a property. You intended to move into the property immediately however the vendor would not settle on the property. The vendor retained your deposit while they remained in the property. You had signed a vacant possession contract of sale and requested the Supreme Court to compel the vendor to complete the sale. The judge made a ruling that the contract of sale be completed with special consideration made that the vendor have up to for six months or until the vendor was able to find alternative accommodation. You received compensation you for your losses. The contract remained as vacant possession after the Supreme Court ordered the amendment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-100, | Income Tax Assessment Act 1997 subsection 118-110(1) and | Income Tax Assessment Act 1997 section 118-135.

Reasons for decision: Summary: Section 118-100 of the Income Tax Assessment Act 1997 (ITAA 1997) states: You can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence. Under subsection 118-110(1) of the ITAA 1997; you are eligible for the exemption if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) 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. A capital gain or loss from a dwelling is ignored for CGT purposes if the dwelling was your main residence throughout the ownership period. 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 the taxpayer acquired the main residence to when it was first practicable to move into the dwelling after it was acquired. The provisions of the relevant explanatory memorandum in respect of section 180-135 read as follows: ' Section 118-135 Moving into a dwelling. | Detailed Reasoning - 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. | Detailed Reasoning - 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.' If a dwelling becomes your main residence by the time it was first practicable for you to move into it after acquiring your ownership interest, the dwelling is then treated as your main residence from when the ownership interest was acquired until it actually became the taxpayer's main residence. The meaning of the expression "the time it was first practicable" should not be read down to mean the time it was first convenient. Caller & Anor v FC of T dealt with a similar case. 'That said, I do not agree with Mr Young's contention that the purchase of a property subject to a lease (the first possibility mentioned above) is for the purposes of this case different from the situation in this case. On the facts in this case the applicants purchased the property on the basis that they would derive rent until they could occupy themselves; it is hard to see a relevant distinction between them and a purchaser who buys subject to a lease because the purchaser, in effect, becomes the lessor under the lease; the only difference is that the lease was entered into prior to purchase; on either basis occupation is not possible until the lease comes to an end. (Senior Member Dunne in Couch referred, albeit briefly, to a situation where occupation is not possible because a tenant is in occupation, but as I read his decision in Couch he was referring to a tenant who takes occupation after completion and where the lease would have been granted by the purchaser.)' Caller & Anor v FC of T also discusses possible scenarios involving purchasers of property not knowing about a lease at the time of purchase. It was established that there would be few circumstances in which a purchaser would not know about a lease or a pre-existing tenant; though a possibility was mentioned in which a purchaser may still be eligible for the full exemption. 'There is a fourth possibility which was not discussed in the hearing but which occurred to me while preparing these reasons. Assume a sale agreement which correctly and validly provides for vacant possession; assume then that a squatter takes unlawful possession of the property between contract and completion. Leaving aside the question of who must take action to eject the squatter it seems to me that the period involved in ejecting the squatter would in all probability qualify for the exemption; of course, such an illegal occupant would not be paying rent.' Application to your circumstances In your case; it is the commissioner's view that you had contracted to obtain possession (and to use as your main residence) from the start of legal ownership but could not do so, owing to the court order. The dwelling is considered to become your main residence from the time that you took ownership of the property. A full exemption from capital gains will be available under section 118-135 of the ITAA 1997.