Private ruling: Capital gains tax
Date of advice: 20 June 2025
Published: 8 September 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a full main residence exemption for your property? | A1: No. | Q2: Can you use the Absence Rule in Section 118-145 of the Income Tax Assessment Act 1997 for the period the property was rented out? | A2: No. | Q3: Are you entitled to a partial main residence exemption for your property? | A3: Yes.

Relevant facts and circumstances: You purchased the property several years ago. At the time you purchased the property it was your intention for the property to be your main residence. You were working FIFO at the time you purchased the property. You worked a number of weeks on and a number of weeks off. It was your intention to live at the property on your days off work. Your FIFO employment ended in the year you purchased the property due to a combination of company redundancies, declining mental health, and your desire to pursue further study. You realised you could not afford to live in the property on your own. You did not move into the property. You made the decision to rent out the property for financial reasons. You engaged a property manager. A residential tenancy agreement was signed with tenants. In the year after you purchased the property, you enrolled in an educational course to continue your education and support a career change. You remained a full-time student for a few years, which further impacted your ability to live independently in the property during that time. You did not treat any other property as your main residence. You moved into the property as your main residence after the study finished and continued to live in the property until it was sold.

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 | Income Tax Assessment Act 1997 section 118-185

Reasons for decision: Summary: You make a capital gain or loss because 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. Whether a dwelling is your main residence depends on the actions of you and your family. Generally, a dwelling is your main residence if: • You and your family live in it • Your personal belongings are in it • It is the address your mail is delivered to • It is your address on the electoral roll • Services such as gas and power are connected. The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant. In 1998, section 118-135 was introduced into the ITAA 1997 which extends the main residence exemption to take account of the time needed to move into a dwelling. It includes the period from when the taxpayer acquired the main residence to when it was first practicable to move into the dwelling after it was acquired. A dwelling is considered your main residence from the time you acquire your ownership interest in it, provided you move in as soon as practicable after your ownership interest in the dwelling commences. Your ownership interest will generally commence on the date of settlement of the purchase contract. The phrase 'as soon as practicable' is not defined in the legislation. However, the Explanatory Memorandum (EM) accompanying the introduction of section 118-135 (The EM to the Tax Law Improvement Bill (No. 1) 1998) explains that whilst section 118-135 is intended to take account of situations where there is a delay in moving in because of illness or other reasonable cause, it is not extended to the situation where the individual is unable to move into the dwelling because it is being rented out. The Explanatory Memorandum includes examples such as where there is a delay in moving in because of illness of the ownership interest holder or other reasonable cause. Section 118-135 of the ITAA 1997 is intended to apply in situations were moving into a dwelling is temporarily delayed due to reasons outside a person's control. In addition, the examples provided in Taxation Determination TD 92/147 illustrate the type of situations envisaged, for example, where repairs to the dwelling needed to be carried out, or your current employer gives you an assignment overseas for a few months. However, the factors against concluding that an individual moved into the dwelling as soon as practicable include: • The length of time between the date the dwelling was purchased and the date you first occupied it; and • what the dwelling is used for during that period (earning rental income). In addition, a dwelling can only be considered your main residence if you occupy the dwelling. A mere intention to construct a dwelling or to occupy a dwelling as a main residence, but without doing so, is insufficient ( Couch & Anor v FC of T 2009 ATC) ( Couch's case) . However, it would not apply where a taxpayer is unable to move in because the dwelling is subject to a lease or where it is merely 'inconvenient' to do so ( Chapman v FC of T (2008) 71 ATR 689) ( Chapman's case). In Chapman's case , the taxpayer purchased a property in Perth in June 2001, but because he worked in Kalgoorlie and for financial reasons, the property was rented out until he took up residence in September 2003. The AAT held that the words 'the time it was first practicable' in section 118-135 of the ITAA 1997 should not be read down to mean 'the time it was first convenient' and, in this situation, it was clear that the taxpayer did not move into the residence by the time it was first practicable to do so after the property was acquired. Section 118-135 of the ITAA 1997 was also held not to apply in Couch's case , where the taxpayers acquired a property in 2000 with the intention of residing in it as their matrimonial home. However, due to employment circumstances, the property was rented out until it was sold in 2006, without the taxpayers having resided in it. The AAT held that the fact that the property was continually being leased and was not being occupied by the taxpayers because of employment circumstances was not enough to invoke section 118-135 of the ITAA 1997. A similar result was achieved in Caller & Anor v FC of T 2009 ATC ( Caller and Anor's case ) where the husband and wife taxpayers purchased a property in 2001 but, as the husband had been transferred 600 kms away for work, they leased it to a tenant until April 2004 when they took occupation of it. They subsequently sold it in 2006 but their claim for the exemption on the basis that they had moved into the property as soon as it was "first practicable" was denied. The AAT found that it was clear that a period when the property was let out and during which rental was being derived could not qualify for the exemption. The Absence rule in Section 118-145 of the ITAA 1997 allows a taxpayer to continue to treat a property as their main residence when they move out of it and rent it out for up to 6 years if for the same period, they are not treating another property as their main residence. | Detailed Reasoning - Application to your circumstances: You purchase the property with the intention for it to be your main residence. You were a FIFO worker at the time of the purchase. You did not move into the property. You realised that you were not going to be able to afford to live in the property on your own and you made the decision to rent it out and you engaged a property manager. You moved into the property a number of years later and commenced treating the property as your main residence. Based on your circumstances we do not consider that you moved into the dwelling as soon as practicable. The Explanatory Memorandum explains that section 118-135 is intended to take account of situations where there is a delay in moving in because of illness or other reasonable cause. It follows that Section 118-135 of the ITAA 1997 is intended to apply in situations were moving into a dwelling is temporarily delayed due to reasons outside a person's control. However, the Explanatory Memorandum makes it clear that a period when the property is rented out and during which rental income is being derived cannot qualify. This principle was also clearly outlined in Couch's Case , Chapman's case and Caller and Anor's case . We do not consider that your circumstances fit within the parameters of the Explanatory Memorandum. Whilst you did eventually move into the property it did take you over 6 years to move into the property and commence treating it as your main residence. In addition to this you rented the property out for several years. Your circumstances are considered comparable to the taxpayer in Chapman's case , in that you did not move into the dwelling when it was first practicable to do so. There was a significant delay from when you acquired your ownership interest in the dwelling, to when you moved into the dwelling, and as noted above the property was rented out for a significant period of your ownership. The legislation does not allow you to treat the dwelling as your main residence from a particular date after purchasing the dwelling, unless you move in. Your circumstances go beyond the circumstances envisaged by the Explanatory Memorandum. Section 118-135 of the ITAA 1997 will not apply because you did not move into the property as soon as practicable, along with the fact that the property was rented out for a significant period of your ownership. Due to this the dwelling will only be treated as your main residence for CGT purposes from the date you moved into it. The Absence Rule will not apply to the relevant period as the property had not been your main residence prior to it being rented. | Detailed Reasoning - Partial main residence exemption from CGT: 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. 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 (listed below) which allows you to adjust the capital gain or capital loss amount calculated on disposal of the property to consider the proportion of your main residence days in the property to the total number of ownership period days of the property. Total Capital Gain × (Number of days the dwelling was your main residence ÷ Total number of days you owned the property) Thecapital gain will be calculated as the difference between the capital proceeds received on the disposal of the dwelling, and the dwelling's cost base. Days in your ownership period will be the total days from the date of settlement of the contract of purchase of the dwelling until the date of settlement of the contract of sale when the dwelling is sold. The property was your main residence for part of your ownership period. You are therefore entitled to a partial main residence exemption on the property for the period XXX 20XX to XXX 20XX under Section 118-185 of the ITAA 1997.