Issue
Can a taxpayer who owned a dwelling and occupied it as their main residence apply the absence rule in section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) if, immediately after ceasing to occupy it, they commenced converting it into commercial premises?
Decision
No. The taxpayer cannot choose to apply the absence rule in section 118-145 of the ITAA 1997 because that rule only applies to dwellings. Once the taxpayer commenced converting the property into commercial premises, the property is no longer considered to be a dwelling for the purpose of the main residence exemption in Subdivision 118-B of the ITAA 1997.
Facts
The taxpayer acquired a dwelling after 19 September 1985 which they used as their main residence.
Several years later, in October 2002, the taxpayer vacated the dwelling and immediately commenced converting it into commercial premises. The conversion took several months and when finished, the taxpayer rented the premises for use as commercial offices.
Since vacating the premises, the taxpayer has not treated any dwelling as their main residence.
The taxpayer sold the property as commercial premises in November 2004 and made a capital gain.
The taxpayer wishes to apply the absence rule in section 118-145 of the ITAA 1997 to continue to treat the property as their main residence for their entire period of ownership.
Reasons for Decision
A capital gain or loss that a taxpayer makes on the disposal of a dwelling that was their main residence for the whole of their ownership period is disregarded. A partial exemption is available if, for example, the dwelling was their main residence for only part of their ownership period (see Subdivision 118-B of the ITAA 1997).
For the purposes of determining the extent of the exemption, a taxpayer can choose to continue to treat a dwelling as their main residence after it has actually ceased to be their main residence (provided they are not also treating another dwelling as their main residence: section 118-145 of the ITAA 1997). However, this choice can only be made for a building that is a dwelling.
The term 'dwelling' is defined in section 118-115 of the ITAA 1997. The definition is an inclusive one so the word has its ordinary meaning in addition to the meanings attributed to it under the ITAA 1997.
The Macquarie Dictionary 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW defines the word 'dwelling' as a place of residence or abode; a house; continued or habitual residence. Whether a structure is a dwelling for CGT purposes will depend on the facts of each case. In Campbell v. O'Sullivan [1947] SASR 195 at 201 it was held that: ..."Dwelling" ordinarily signifies a place of abode or residence, a tenement, habitation, or house, which premises a person or persons are using as a place for sleeping, and usually for the provision of some or all of their meals. The word is not used as a term of art, and has to be interpreted in accordance with its ordinary, proper, and grammatical sense in the context in which it appears ...
Under the ITAA 1997, a dwelling includes a unit of accommodation that is a building or is contained in a building, and consists wholly or mainly of residential accommodation (paragraph 118-115(1)(a)). A dwelling also includes land immediately under the unit of accommodation (paragraph 118-115(1)(c) of the ITAA 1997).
Therefore, a building will satisfy the ordinary and extended meaning of 'dwelling' only to the extent that it is suitable for residential accommodation. The building in this case ceased to be suitable for residential accommodation when the taxpayer started converting it into commercial premises. From that time onwards, the land and building were no longer considered to be a dwelling within the ordinary meaning of the term or its extended statutory meaning in section 118-115 of the ITAA 1997.
Accordingly, the taxpayer cannot choose to apply the absence rule in section 118-145 of the ITAA 1997. History note: The following statement about the application of the partial main residence exemption has been removed from the Reasons for Decision on 13 May 2005 as the view expressed in the statement is being reconsidered. This means that the taxpayer will only be entitled to a partial main residence exemption when they dispose of the property (section 118-185 of the ITAA 1997). In applying the formula in subsection 118-185(2), the period from the time the taxpayer commenced to convert the property into commercial premises until the end of the ownership period will be treated as non-main residence days.