Private ruling: Capital gains tax – main residence exemption – absence choice
Date of advice: 10 April 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim a main residence exemption under the six year absence rule for the property you intended to make your main residence? | A1: No.

Relevant facts and circumstances: You were transferred by your employer to Country X several years ago. You were on a three-year contract and intended to return to Australia after the contract. While you were still overseas you acquired the property A. You owned another property in Australia which you sold while living and working in Country X. At that point you did not own any other residences globally apart from property A which you considered to be your principal place of residence. You had every intention of moving back to it upon your return to Australia. Your company extended your Country X contract by one year and then asked you to move to the Head Office in Country Y. In Country Y you spent many months actually living in a hotel while you looked for a suitable place to rent. As the Head Office is in the countryside area of Country Y this proved very difficult. You were forced to buy a property that was suitable. As interest rates are very low in Country Y this proved to be cost effective but while this technically meant that you owned a property that you were living in, this status was only created due to the lack of rental properties in the area. You stress that you always considered the Country Y property as a ‘cost effective temporary solution to the lack of rental properties’ and property A as your principal place of residence. The Country Y property has been sold. Subsequently your personal circumstances changed and this led to divorce. You left Country Y and you intended then to return to Australia and reside in property A. However the company with which you found employment was based in another state of Australia. You were therefore not able to move in to property A.

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: Detailed Reasoning - Main residence exemption: Usually a resident of Australia can ignore a capital gain or capital loss from a capital gains tax (CGT) event that happens to your ownership interest in a dwelling that is your main residence (also referred to as your home). A dwelling is considered to be your main residence from the time you first purchased it if you moved into it as soon as practicable after that time. This would generally be the date of settlement of the purchase contract. To qualify for a full main residence exemption from CGT: ● the dwelling must have been your home for the whole period you owned it; ● you must not have used the dwelling to produce assessable income; and ● any land on which the dwelling is situated must be 2 hectares or less. If you are not fully exempt, you may be partially exempt if: ● the dwelling was your main residence during only part of the period you owned it; ● you used the dwelling to produce assessable income; or ● the land on which the dwelling is situated is more than 2 hectares. | Detailed Reasoning - Main residence exemption – absence choice: You can make a choice that one dwelling continues to be treated as your main residence even though it has ceased to be so. The choice can be made for a total of six years where the dwelling was rented out, or indefinitely where it was not used for this purpose. The six year period starts fresh each time you move back into the property and establish it as your main residence and then move out and make it available for rent again. This extension of the main residence exemption will not apply in the situation where a taxpayer purchases a property with the intention of occupying it as their main residence but never actually occupies the property. In Adelaide a case went to the Administrative Appeals Tribunal ( Couch and Federal Commissioner of Taxation [2009] AATA 41). Here the taxpayers were a married couple who had acquired a property in June 2000 with the intention of residing in it as their matrimonial home. However, due to employment circumstances the property was rented out. In December 2006 the taxpayers sold the property without having resided in it. The Commissioner ruled in a private ruling that the capital gain derived on the disposal of the property was subject to capital gains tax and that the main residence exemption was not available. The taxpayers' objection to the ruling was disallowed and the taxpayers sought review by the AAT. The taxpayers submitted that it was always their intention to occupy the property as their matrimonial home, but since employment circumstances prevented them from doing so they should be entitled to the main residence exemption pursuant to section 118-110 of the Income Tax Assessment Act 1997 . The Commissioner submitted that as the taxpayers did not reside in the property at any stage, the exemption was not available. It was explained that something that was only an intention by a taxpayer to occupy a property as a main residence was insufficient to give rise to the exemption in section 118-110. That section contemplated that a dwelling would be occupied as a main residence throughout the ownership period, subject to the extension provisions in section 118-135. As the taxpayers did not reside in the property at any stage during the ownership period the main residence exemption was not available. The fact that the property was continually being leased and was not being occupied by the taxpayers because of employment circumstances was not sufficient to enable section 118-135 to be invoked. The AAT affirmed the objection decision as it was not satisfied that the main residence exemption was available to the applicants in respect of the disposal of the property. Looking at your circumstances, we can see that they are very similar to Couch . Even though you always intended to move into property A and establish it as your main residence, circumstances prevented you from actually doing so. Therefore you are not entitled to claim a main residence exemption for property A.