Private ruling: Capital gains tax
Date of advice: 9 August 2023
Published: 25 September 2023
Ruling period: Year ended 30 June 2023
Date scheme commenced: 1 July 2022

Ruling: Q1: Are you entitled to a full main residence exemption on the property? | A1: No. | Q2: Are you entitled to a partial main residence exemption main residence exemption on the property? | A2: Yes. | Q3: Are you able to use the first use to produce income rule in Section 118-192 of the Income Tax Assessment Act 1997 when calculating your Capital gain? | A3: No.

Relevant facts and circumstances: You purchased a property with the intention of moving into the property and treating it as your main residence. You were renting a property. You spent a couple of weeks in the new property fixing it up. In the next month you packed up your rental property and moved your belongings to the new property. In the same month that you purchased the property you started to be stalked. After you moved into the property you were still being stalked via text and phone. It was your intention to move into the property and find work as a professional in the same area. When you moved you stayed with friends while looking for work. Settlement on the property occurred a few months later. You had to change your phone number and was not able to market yourself properly due to the stalking and this impacted on your ability to find work. You did not feel comfortable with moving into the property while the stalking was ongoing. A couple of months later you rented the property out. A few months later you had an operation. You then went back to the area the property was located in and stayed with friends who you paid rent to. Throughout this time the stalking continued. You obtained casual work. After a number of months the stalker was arrested. In the following year you took up work as a professional. You stayed with a friend and then in a share house for the majority of the year. In the middle of the year, you purchased another property in a different location. You then sold that property in the next year. You rented an apartment until you purchased another property and you moved into the property. In the next year you decided to sell a property to reduce your debt and you placed the first property on the market. It did not sell. In the following year you sold the third property and intended to move back to the first property. The tenants in the property broke their lease and moved out. You went to the property to inspect the house and clean it and you decided to move back. All your belongings were sent to the property. You finished up your work. You planned to live there permanently and to build up work as a professional. You were not able to secure work. You were offered a position with an organisation, which you had previously applied for. You accepted the offer and left your belongings in a room in the house. You signed a lease to pay rent, to take up the position, and returned to work as a professional part time. The position you had accepted was for several months. The first property was rented out and access was made available for you to check on furniture during their tenancy. After a number of months, the tenants vacated the house and you moved in for the next few weeks. The new tenant moved in shortly thereafter. All your furniture was there, and an arrangement was made that you would visit periodically and stay there during the year. You were renting accommodation with the organisation that had offered you the position and returned to complete your time there and to work part time prior to retiring. Towards the end of the year finished the position. You packed up and left to stay with a friend for the summer holidays. You moved back to the first property a couple of months later. The tenant moved out of the property at this time. You lived in the property until it sold a couple of years later and settled several months later. You are now living in another property you purchased.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110

Reasons for decision: Summary: You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss. You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it. You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it. Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate. | Detailed Reasoning - CGT main residence: Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income. As the property was not your main residence for the whole of your ownership period you cannot have a full main residence exemption on the property. You did not move into the property as soon as practicable after you purchased it. You decided to rent it out and you lived in the property a number of years after it was rented out. The Commissioner understands that there were circumstances which influenced your decision to rent the property out but the fact remains that you did not live in the property as your main residence from the date you purchased the property. In Couch & Anor v Federal Commissioner of Taxation [2009] AATA 41 at paragraph 14, the Tribunal confirmed that the 'mere intention to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption.' | Detailed Reasoning - Question 2: Where a full exemption is not available, you may be entitled to a partial exemption under section 118-185 of the ITAA 1997. You calculate your capital gain or capital loss as follows: Capital gain or capital loss amount x Total days Non-main residence days / total number of days you are entitled to a partial main residence exemption You are entitled to a partial main residence for the days you lived in the property as your main residence . | Detailed Reasoning - First use to produce income rule: This rule (under subsection 118-192(2) of the ITAA 1997) provides that you are taken to have acquired the dwelling at its market value at the time it was first used to produce income if all of the following conditions apply: • you acquired the dwelling on or after 20 September 1985; • you first used the dwelling to produce income after 20 August 1997; • when a CGT event happens in relation to the dwelling, you would only get a partial exemption because the dwelling was used to produce income during the period you owned it (your ownership period); and • you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income. Where these conditions are satisfied, you do not have to keep records of expenditure on a dwelling which is solely a main residence until the time when it is first used for income-producing purposes. You are not able to use section 118-192 of the ITAA 1997 when calculating your capital gain as you did not move into the property an establish it as your main residence as soon as practicable after you purchased the property. The property was not your main residence until several years later and was rented up until this time. You are entitled to a partial main residence on the property and the first element of your cost base when calculating your CGT liability will be its purchase price.