Private ruling: P artial main residence exemption
Date of advice: 30 May 2022
Published: August 2022
Ruling period: Year ended 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2020

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 from the date you commenced living in the property? | A2: Yes.

Relevant facts and circumstances: You purchased a dwelling. The dwelling had tenants under a lease which expired several months later. Your intention was to move into the dwelling and live there as your main residence once the existing tenants moved out. A number of months after settlement, the real estate agent, without your consent, subsequently placed new tenants in the dwelling on a 6 month lease. You notified the tenants that they could break their lease early, as it was your intention to occupy the dwelling. Owing to a tight rental market, it took the tenants a while to find new premises. The tenants vacated the dwelling several months later and you promptly commenced the process of moving in. During the period from when settlement took place until you eventually moved in you were acting as sole carer for a relative. Your relative lived alone in a rural location nearby to where you were renting and was undergoing treatment for a serious illness. You subsequently sold the dwelling. The land on which the dwelling is situated is less than 2 hectares. You had no interest in any other property throughout the relevant period.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 118-130 | Income Tax Assessment Act 1997 section 118-135 | Income Tax Assessment Act 1997 section 118-185

Reasons for decision: Detailed Reasoning - Main residence exemption: You make a capital gain or capital loss if a CGT event happens. CGT event A1 occurs when you dispose of a CGT asset to someone else. Land and dwellings are examples of CGT assets. The time of the event is when you enter into the contract for the disposal (section 104-10 of the ITAA 1997). Subdivision 118-B of the ITAA 1997 determines the extent to which any capital gain or loss is ignored when a CGT event happens to your dwelling. Section 118-110 of the ITAA 1997 disregards a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling, if you are an individual, the dwelling was your main residence throughout your ownership period, and where the interest did not pass to you from the estate of a deceased person. You have an ownership interest in land or a dwelling you acquire under a contract from the time you obtain legal ownership of it; or if the contract or a related contract gives you a right to occupy it at an earlier time - the earlier time (subsection 118-130(2) of the ITAA 1997). A partial exemption is available for a CGT event that happens to a CGT asset that is a dwelling, where the dwelling was your main residence for only part of your total ownership period (section 118-185 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 the taxpayer acquired the main residence to when it was first practicable to move into the dwelling after it was acquired. As such, 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. The phrase 'as soon as practicable' is not defined in the legislation. The 'Explanatory Memorandum' to the Tax Law Improvement Bill (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 person's control. The Explanatory Memorandum states that section 118-135 takes into account situations where, for example, there is a delay in moving in because of 'illness or other reasonable cause'. Further, the Explanatory Memorandum specifically states that 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. Whether the dwelling becomes the taxpayer's sole or principal residence as soon as practicable after erection or completion, depends on the facts of each case. The personal circumstances of the taxpayer may be relevant in limited cases only (Taxation Determination TD 92/147 Income tax: capital gains ). The types of situations envisaged in TD 92/147 are for example, where immediate repairs to the dwelling are needed to be carried out, or your current employer gave you a temporary work assignment in a different location for a very short period of time such as 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 it was first occupied; and • what the dwelling is used for during that period (eg earning rental income). Further, 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 actually doing so, is not sufficient to obtain the main residence exemption ( Couch and Commissioner of Taxation [2009] AATA 41) (Couch's case). Section 118-135 of the ITAA 1997 was held to not 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 Administrative Appeals Tribunal (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. In Chapman and Commissioner of Taxation [2008] AATA 421 (Chapman's case), the taxpayer purchased a property in June 2001 but, because they worked in another city and for financial reasons, the property was rented out until they took up residence in September 2003. The AAT said that 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. Further, the tribunal stated that the phrase 'time it was first practicable' should not be read to mean 'the time it was first convenient'. A similar decision was held in Caller and Commissioner of Taxation [2009] AATA 890 (Caller'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 income was being derived could not qualify for the main residence exemption. It was affirmed that the Couch and Chapman cases were correctly decided. | Detailed Reasoning - Application to your circumstances: In your case, you purchased a dwelling with the intention of it being your main residence; however, the dwelling was rented to tenants from when settlement for the purchase took place until several months later and was then re-let without your consent. You were only able to occupy the dwelling several months later. Whilst we acknowledge that you could not move into the dwelling while it was tenanted, and you were also caring for your relative in difficult circumstances, the fact remains that a mere intention to move into a dwelling and occupy it as your main residence is not enough to meet the conditions of section 118-135 of the ITAA 1997 and treat the dwelling as your main residence from when you acquired it. The legislation does not allow you to treat the dwelling as your main residence unless you actually move in and reside in the property. The reasons for your extended delay for moving into the property unfortunately go beyond the temporary circumstances envisaged by the Explanatory Memorandum as intended by the Australian Parliament. The 'as soon as practicable' rule can only be looked at once, that is, during the initial period after settlement for the purchase. In your case, even if the re-letting of the dwelling without your consent was 'outside your control', the main residence exemption is still only available from when you moved in as it is only the circumstances during the initial period after settlement that the legislation considers. The Commissioner of Taxation does not have any discretion to vary this. Consequently, section 118-135 of the ITAA 1997 will not apply to you because you did not move into the property as soon as practicable. Therefore, the dwelling can only be treated as your main residence for CGT purposes from the date you occupied it. You will need to apportion any capital gain made on the disposal of the dwelling in accordance with subsection 118-185(2) of the ITAA 1997. The main residence exemption is not available prior to you first occupying the dwelling in August 2021 as your main residence. | Detailed Reasoning - Partial main residence exemption: Use the following formula to calculate the taxable portion of your capital gain or loss when where the dwelling was your main residence for only part of your entire ownership period: Capital gain or loss x Non-main residence days Total days in your ownership period Step 1: Calculate your capital gain or loss from selling or disposing of the property. Step 2: Multiply the amount at step 1 by the number of non-main residence days. Step 3: Divide the amount at step 2 by the total days in your ownership period. The capital gain or loss will be calculated as the difference between the capital proceeds received on the disposal of the dwelling, and the dwelling's cost base. Non-main residence days will be the total number of days that the dwelling is not considered to be your main residence. This will cover the period from the date of settlement of the contract for purchase of the dwelling until the day before you moved into the dwelling. 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 was sold. To confirm the taxable portion of your capital gain or loss you can also use the CGT property exemption tool on ato.gov.au by searching for quick code QC 18138.