Private ruling: Main residence exemption
Date of advice: 23 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to the full main residence exemption on the sale of the property? | A1: No. | Q2: Are you entitled to a partial main residence exemption on the sale of the property? | A2: Yes.

Relevant facts and circumstances: You purchased a property. The property is less than 2 hectares. The property was purchased with the intention of making it your main residence as you were in the process of starting your own family. At the time you purchased the property you were residing with relatives in their home acting as their live-in carers assisting them with their day to day living. Your relatives had asked you to move into their home as they were dependent on you to assist them with their daily needs. At the time you purchased your home, your relatives were still heavily dependent on you and expected you to stay to assist them. You then decided to rent the property to a friend stayed there for approximately 12 months. During that time your friend allowed you to come and go into your house as you needed and allowed you to make improvements whilst they lived there in preparation to move into the home. You continued to pay utilities at the property. You then moved into the property. While living at the property, your relative’s health deteriorated further and they asked you to reside with them again. You moved back into your relative’s home and acted as their live-in carers again. You then rented out the property for a period of less than six years. You continued to treat the property as your main residence during this time. You have now sold the property

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-115 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-135 | Income Tax Assessment Act 1997 Section 118-145

Reasons for decision: Detailed Reasoning - Main residence: Generally, you can disregard any capital gain or capital loss realised on the disposal of a dwelling that was your main residence. In order to get the full exemption from capital gains tax (CGT) the following conditions must be met: ● you are an individual; ● you moved into the dwelling as soon as practicable; ● the dwelling must not have been used to produce assessable income; and ● the dwelling was your main residence throughout your ownership period. | Detailed Reasoning - Moving into the dwelling as soon as practicable: Section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) extends the main residence exemption to take into account the time needed to move into a dwelling. The section allows you to treat a dwelling as your main residence for the period from when you acquired it until it was first practicable to move into it. 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 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 the persons control. The provision takes into account situations where, for example, there is a delay in moving in because of illness or other reasonable cause. The examples provided in Taxation Determination TD 92/147 illustrate the type of situations envisaged. The factors against concluding that you moved into the dwelling as soon as practicable include: ● the length of time between the date the dwelling was completed and the date you first occupy it; and ● what the dwelling is used for during that period (earning rental income). | Detailed Reasoning - Absence Rule: Subsection 118-145(1) of the ITAA 1997 allows you to choose to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence. This choice needs to be made only for the income year that a CGT event happens to the dwelling that is, the year that you enter into a contract to sell it. If you make this choice, you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are changing residences). If you use the dwelling to produce income you can choose to treat it as your main residence for up to six years after you cease living in it. If you are absent more than once during the period you own the home, the six-year maximum period that you can treat it as your main residence while you use it to produce income applies separately for each period of absence. | Detailed Reasoning - Application to your circumstances: In your case, you did not move into the dwelling as soon as practicable. While we acknowledge your circumstances, the fact that you were already living with relatives as live-in carers when you purchased the property, you rented out the property before you moved into it and it was a number of years before you moved into the property indicate that you did not move into the dwelling as soon as practicable. Therefore, you are not eligible for the full main residence exemption for the period between the settlement date and the date you move into the dwelling. It is accepted that you are entitled under subsection 118-145(1) of the ITAA 1997, to treat the residence as your main residence during the period you were renting it out for the second time for the following reasons: ● the property was first occupied as your main residence before it was let out, and ● the rental period did not exceed six years. Consequently, as you did establish the dwelling as your main residence when you physically moved into the dwelling, you will be entitled to a partial main residence exemption. Partial main residence exemption from CGT Section 118-185 of the ITAA 1997 provides that you are entitled to a partial 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 a formula which allows you to adjust the capital gain or capital loss amount calculated on disposal of the property to take into account the proportion of your main residence days in the property to the total number of ownership period days of the property. If a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that occurs in relation to the dwelling. The capital gain or loss is calculated using the following formula: Capital gain or loss amount X non-main residence days total ownership period days In your case, you will be entitled to a partial main residence exemption. Your non-main residence days will be the total number of days between when you purchased the property and when you first occupied the property. The total number of days in your ownership period will be the total days from the date of purchase until the date the dwelling is sold.