Are you entitled to apply the main residence exemption and the 6 year-rule under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: XX XXXX 20XX
You purchased a property with a dwelling on it (the property) with settlement occurring on Date 1. After purchasing the property, you undertook some work to the property. You used a second tier lender to purchase the property and insured the property through the lender. Once the property was rented out, you moved your loan to Bank A. You have been unable to provide your original loan documents or any insurance related documents. You didn't receive the stamp duty reduction for first home buyers when you purchased the property. You didn't advertise the property for rent. The real estate agent you purchased the property from advised you that a family was looking for a rental property and would rent the property when it was available. Prior to purchasing the property, you resided at your parents' house. You also resided at your parents' house once you commenced renting out the property. In your Rental Property Schedule for the income year in which you first rented out the property, you declared that: • the date the property first earned rental income was the day after settlement • the number of weeks the property was rented in the income year was X weeks
• the gross rent received for the income year was $X,XXX. Electricity was not connected to the property prior to the tenants moving in while you were undertaking work on the property. You used a generator at the property to supply power when necessary. There was an outdoor BBQ at the property which could be used if necessary. Your parents dropped off food at the property for you. You continued to have mail directed to your parents' house and you didn't change your address on the Electoral roll. You sold the property in the 20XX-XX income year and declared the capital gain in your 20XX-XX tax return. You recently saw a video online which caused you to look into whether you could exercise the absence choice in relation to the property.
Income Tax Assessment Act 1997 section 103-25 Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 118-145
Main residence Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a capital gains tax (CGT) event that happens to a dwelling that is your main residence. To qualify for the full main residence exemption: • You must be an individual • the dwelling must be your main residence throughout your ownership period • the interest must not have passed to you as a beneficiary in, and you must not have acquired it as a trustee of, the estate of a deceased person. 'Main residence' is not a defined term. The question of whether a dwelling is your main residence depends on the circumstances of your particular case. Some of the factors that are relevant when considering whether a dwelling is your main residence are: • the length of time you lived in the dwelling; • the place of residence of your family; • whether you moved your personal belongings into the dwelling; • the address to which you have your mail delivered; • your address on the electoral roll;
• the connection of services such as telephone, gas and electricity; and • your intention in occupying the dwelling. In Case 26/93, 93 ATC 320 the Administrative Appeals Tribunal (AAT) stated that the considerations above, while relevant, are not exhaustive. The AAT referred to the comments of Williams J in Koitaki Para Rubber Estates Ltd v FC of T (1941) 6 ATD 82 at p 249: The place of residence of an individual is determined, not by the situation of some business or property he is carrying on or owns, but by reference to where he eats and sleeps and has his settled or usual abode. The AAT said that the further question of whether a dwelling is a person's principal residence is essentially a matter of fact and degree ( Byrne v Rowbottom (1969) 210 Estates Gazette 823 ) and that, in determining this question, the decision-maker had to make a commonsense assessment taking into account a number of varying and even conflicting circumstances. The element of continuity of living arrangements was said to be a factor in deciding where one lives ( Collector of Customs v Perkins Shipping Pty Ltd (1989) 24 FCR 520 at p 525).
The substitution of the expression "sole or principal residence " (used under the Income Tax Assessment Act 1936 (ITAA 1936) with " main residence" (introduced because it is shorter and considered to be more apt) was not intended to introduce any substantive change. A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to satisfy that you have established the property as your main residence and get the exemption. You have argued that you moved into the dwelling on the property and established it as your main residence from settlement until it was rented out a few weeks later. However, you have provided insufficient information to conclude that this is the case. Prior to purchasing the property, you resided at your parents' house for an extended period of time and lived there after the property was rented out. We do not consider that your parents' house stopped being your main residence and you established the property as your main residence. Factors we have considered when making this decision include the following:
• You did not use the kitchen cooking facilities, but instead advised that you used the outdoor barbecue and had food brought to you by your parents. • You did not notify any authorities about your change of address. • You did not have the electricity connected and relied on a generator. • In your Rental Property Schedule for the income year the property was first rented out, you provided the day after settlement as the date the property first earned rental income and stated that the property was rented for X weeks in that income year. It also stated that the gross rent received for the property that income year was $X,XXX. That is, the information that you provided in your Rental Property Schedule for the 20XX-XX income year indicates that the property was a rental property from settlement. • The 3 week period after settlement that you contend that you lived at the property is very brief and both before and after this period you resided at your parents' address which is situated only XXX meters from the property.
• If the property was to be your home, your original loan application would have been for an owner-occupier loan. However, you have been unable to provide your original loan application. Also, you have been unable to provide any other objective contemporaneous documentation (such as emails with your real estate agent or insurance documents) to demonstrate that the property was originally your home before it became a rental property.
• At the time you purchased the property, a 50% stamp duty reduction for first home buyers was available and would have been a well-known concession in the real estate industry. The standard procedure was for a first home buyer's conveyancer or solicitor to apply for it as part of the conveyancing process and the reduced stamp duty paid at settlement. If a first home buyer later failed to meet the 12-month residency requirement, they were required to notify the State Revenue Office which would then have reassessed the duty and sent the property owner a bill to pay the 50% duty reduction they received on the purchase. It would be expected that your real estate agent or conveyancer/solicitor would have asked if the property was to be your first home to determine if you were entitled to a reduction in stamp duty and if it was, they would have arranged for the 50% stamp duty reduction for first home buyers to be applied for.
The surrounding circumstances do not indicate that the property was your main residence before it was rented out. Also, there is no objective contemporaneous documentation to support such a conclusion. Therefore, we do not consider that you established the property as your main residence. Absence choice Subsection 118-145 (1) of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. This is sometimes referred to as the absence choice. Section 118-145 of the ITAA 1997 can only apply if a dwelling ceases to be your main residence. If you have never used a dwelling as your main residence, it cannot be said that you have ceased to use it as such. The result of this is that you cannot choose to continue to treat the dwelling as your main residence. As you did not establish the dwelling on the property as your main residence, you cannot make an effective absence choice. Extension of time to use the absence rule
Even if we considered that the property was your main residence initially, you would still need an extension of time to use the absence rule as you did not make a choice to use the absence rule when you lodged your tax return in which you declared the capital gain (as required under section 103-25 of the ITAA 1997). But as we do not consider that the property was originally your main residence, the absence rule is not applicable and therefore, we do not need to make a decision on whether we would grant an extension of time. Disregarding a capital gain or loss Subsection 118-110(1) of the ITAA 1997 allows you to disregard a capital gain or capital loss on disposal of a dwelling that was your main residence throughout your ownership period. To meet the conditions for the exemption, you must first have established a dwelling as your main residence. If you have never established a dwelling as your main residence, you are not eligible for either a partial or full main residence exemption on disposal of a dwelling. This means that you can't disregard any part of the capital gain or loss incurred on disposal of the property.
As you don't meet the conditions in subsection 118-110(1) of the ITAA 1997, you are unable to disregard any part of the capital gain on disposal of the property.