Private ruling: Capital gains tax and the main residence exemption
Published: October 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and answers | Can you claim the main residence exemption from capital gains tax on your property for the entire ownership period? | No


Relevant legislative provisions: Income Tax Assessment Act 1997 102-20. | Income Tax Assessment Act 1997 Section 118-135. | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Summary: You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT). Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss as a result of a CGT event. The sale of a dwelling would constitute CGT event A1 as stated in section 104-10 of the ITAA 1997. Section 118-110 of the ITAA 1997 states that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period. For the main residence exemption to apply for your whole ownership period, you must move into the dwelling as soon as practicable after you purchase the dwelling as outlined in section 118-135 of the ITAA 1997. 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 acquired the main residence to when it was first practicable to move into the dwelling after it was acquired. This is to take account of situations where, for example, there is a delay in moving because of illness or other reasonable cause beyond your control. The term 'as soon as practicable' is used in section 118-135 of the ITAA 1997 to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the property became your main residence on the date you acquired it. (ie. You would have to physically move in on that day.) 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 home is temporarily delayed due to matters outside the persons control and, during the delay, they don't take up residence elsewhere for any substantial period. Taxation Determination TD 92/147 supports this approach. In the present case, you have signed a lease agreement for a rental property which carries with it penalties for breaking that lease agreement. As the decision to enter into a lease on a rental property was a voluntary decision on your part, this is not a situation beyond your control. Your contention that you could not move in until your lease on a rental property was completed is not sufficient reason to take advantage of the time granted under section 118-135 of the ITAA 1997. It is considered that you would not occupy the dwelling when it was first practicable to do so within section 118-135 of the ITAA 1997.

Relevant facts: You are in the market to purchase a first home. | You have taken an interest in a new home that will be close to where you currently reside. | The new home construction will be completed in the near future. | You have not entered into a purchase contract yet for this new home. | You currently reside in rented accommodation. You have a rental contract that has penalties for the early termination of the lease. | You intend to move in to your new home when the lease ends.