Private ruling: CGT - main residence
Date of advice: 6 March 2017
Published: March 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to the full main residence exemption from capital gains tax on the disposal of your property? | A1: No. | Q2: Are you entitled to a partial main residence exemption from capital gains tax on the disposal of your property? | A2: Yes.

Relevant facts and circumstances: You purchased a dwelling with settlement occurring in October 20XX. The dwelling had a pre-exiting lease at the time of purchase which was due to expire in late 20XX. You advised the tenants of your intention to move into the dwelling and you asked them to vacate at the end of the lease period. You moved into the dwelling in late 20XX after you requested them to vacate ending the lease and the tenants vacated. You lived in the dwelling as your main residence until early 20XX when you moved out.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | 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: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can make a capital gain or loss only as a result of a capital gains tax (CGT) event. The most common CGT event is CGT event A1 which triggers when an entity disposes of a CGT asset to another entity. CGT assets include real estate acquired on or after 20 September 1985. Section 118-110 of the ITAA 1997 provides that you can disregard any capital gain or capital loss on the disposal of a dwelling that was your main residence for your entire ownership period. To be eligible to apply the full main residence exemption, you must move into the dwelling, making it your main residence as soon as practicable after you purchase the dwelling (section 118-135 of the ITAA 1997). Section 118-135 of the ITAA 1997 extends the main residence exemption to take into account the time needed to move into a dwelling. It includes the period from when you acquired the main residence (generally the date of settlement) to when it was first practicable to move into the dwelling after it was acquired. The term 'as soon as practicable' in section 118-135 of the ITAA 1997 is used to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the dwelling became your main residence on the date you acquired it; that is, you would have to physically move in to the dwelling on the day of settlement. The Explanatory Memorandum to the Bill which became the Tax Law Improvement Act (No.1) 1998, indicates that section 118-135 of the ITAA 1997 is intended to apply in situations where moving into the dwelling is temporarily delayed due to matters outside a person’s control. 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. In your case, the dwelling you purchased in October 20XX had existing tenants with a lease until late 20XX. At the end of the lease you asked the tenants to vacate the property, allowing you to move in. As having pre-existing tenants is not considered to be a situation beyond your control, it is considered that you did not occupy the dwelling when it was first practicable to do so. You therefore will not be entitled to apply the full main residence exemption from CGT upon disposal of your property. Question 2 Section 118-185 of the ITAA 1997 provides that you are entitled to a partial main residence exemption from CGT where a dwelling was your main residence for part of your ownership period. Subsection 118-185(2) of the ITAA 1997 provides the formula to calculate the partial main residence exemption upon disposal of your property. You calculate your capital gain or capital loss using the formula: Capital Gain or Capital Loss amount × Non-main residence days Days in your ownership period (*non-main residence days are the number of days where a dwelling was not occupied as your main residence). In your case, the dwelling was you main residence for part of your ownership period and therefore you will be entitled to a partial main residence exemption upon disposal of your property.