1 Will the capital gain made by the Taxpayer in relation to the disposal of the Property be partially disregarded pursuant to section 118-185 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 For the purposes of subsection 118-185(2) of the ITAA 1997, did the 'non-main residence days' in respect of the Property end on 17 February 2016? Answer Yes. This ruling applies for the following period : Year ending 30 June 20XX
On XX August 20XX, the Taxpayer and his wife (at the time) purchased the Property. The Taxpayer was not an Australian resident at the time of purchase, but was planning to relocate his business to Australia and live in XXXX permanently. From January 20XX to January 20XX, the Taxpayer and his family resided overseas and rented out the Property. From January 20XX to XX February 20XX, the Taxpayer substantially renovated the Property and stayed there for a couple of brief periods whenever he was in Australia. The Taxpayer and his then wife separated in 20XX and, under a court-ordered divorce agreement executed in 20XX, the Taxpayer obtained full ownership of the Property. The Taxpayer moved into the Property on XX February 20XX with his daughter and parents. In January 20XX his daughter was enrolled as a Year X student at a local school.
From XX February 20XX to XX May 20XX, the Taxpayer frequently travelled overseas (without his daughter and parents) for business purposes and spent the majority of his time outside of Australia (approximately 60%). He stayed in different city hotels during business trips and, when in Country A, also spent time at his current wife's property in XXXX as well as his own serviced apartment in XXXXX. From XX February 20XX to XX May 20XX, the Taxpayer lived in the Property whenever he was in Australia. The Taxpayer's daughter and parents consistently resided in the Property throughout this period. The Taxpayer relocated his business to Australia in early 20XX and became an Australian resident for tax purposes from XX May 20XX. The Property is the only property owned by the Taxpayer in Australia since the court order in 20XX took effect. Since having moved into the Property on XX February 20XX, it has been recorded as the Taxpayer's address on his driver licence, bank statements etc. and phone/internet and all utility service accounts attached to the Property have been held in the Taxpayer's name.
The Taxpayer's father lived at the Property until his death in May 20XX. The Taxpayer's mother lived in the Property until July 20XX. The Taxpayer has continued to live at the Property with his daughter. The Property is currently advertised for sale. Its sale is expected to result in a capital gain for the Taxpayer. The Taxpayer submits that: • the Property was not his main residence from the date of its acquisition (on XX August 20XX) until XX February 20XX; and • the Property has been the Taxpayer's main residence since XX February 20XX, including for the period up to XX May 20XX during which he was not an Australian resident for tax purposes.
Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 subsection 104-10(3) Income Tax Assessment Act 1997 subsection 104-10(4) Income Tax Assessment Act 1997 section 108-5 Income Tax Assessment Act 1997 Subdivision 118-B Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 subsection 118-110(4) Income Tax Assessment Act 1997 subsection 118-110(5) Income Tax Assessment Act 1997 section 118-115 Income Tax Assessment Act 1997 section 118-175 Income Tax Assessment Act 1997 section 118-185 Income Tax Assessment Act 1997 subsection 118-185(1) Income Tax Assessment Act 1997 subsection 118-185(2)
All subsequent legislative references are to the ITAA 1997. Summary The Taxpayer will partially disregard any capital gain he makes on the disposal of the Property pursuant to section 118-185 and, for the purposes of calculating the capital gain from that disposal in accordance with the formula in subsection 118-185(2), the non-main residence days ended on 17 February 2016. Detailed reasoning Section 102-20 provides that you make a capital gain or capital loss if and only if a CGT event happens. The most common CGT event, CGT event A1, occurs pursuant to section 104-10 when you dispose of a CGT asset. Land and buildings are CGT assets within the meaning of section 108-5. The time of the CGT event A1 is generally when you enter into the contract for the disposal (subsection 104-10(3)). Subdivision 118-B determines the extent to which any capital gain or loss is ignored when a CGT event happens to a dwelling that is your main residence.
Unless you are an 'excluded foreign resident' (defined in subsection 118-110(4)) at the time the CGT event happens, or a foreign resident who doesn't satisfy the 'life events test' in subsection 118-110(5) at the time the CGT event happens, section 118-110 disregards a capital gain or capital loss you make from a CGT event that happens to a CGT asset that is a 'dwelling' (as defined in section 118-115), if: (a) you are an individual; (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you from the estate of a deceased person. Partial main residence exemption Unless you are an excluded foreign resident at the time the CGT event happens, or a foreign resident who doesn't satisfy the life events test in subsection 118-110(5) at the time the CGT event happens, subsection 118-185(1) states that you get only a partial exemption for a CGT event that happens in relation to a dwelling if: (a) you are an individual; (b) the dwelling was your main residence for part only of your ownership period; and (c) the interest did not pass to you from the estate of a deceased person.
Subsection 118-185(2) provides a formula to calculate your capital gain or capital loss under such circumstances as follows: CG or CL amount x Non-main residence days Days in your ownership period Where: 'CG or CL amount' is the capital gain or capital loss you would have made from the CGT event apart from Subdivision 118-B; and 'Non-main residence days' is the number of days in your ownership period when the dwelling was not your main residence. What constitutes a main residence? For the main residence exemption to apply (in full under section 118-110 or partially under section 118-185), the relevant dwelling must be your main residence. There is no statutory definition of the term 'main residence' for the purposes of the exemption. Whether a dwelling is your main residence depends on the facts of each case and will be decided in light of all the relevant circumstances. The matter must be decided objectively. According to the ATO's Guide to capital gains tax 2022 , the following factors may be relevant in working out whether a dwelling is your main residence:
the length of time you live there (there is no minimum time a person has to live in a home before it is considered to be their main residence) whether your family lives there whether you have moved your personal belongings into the home the address to which your mail is delivered your address on the electoral roll the connection of services (for example, phone, gas or electricity) your intention in occupying the dwelling. Dependent child having different main residence Section 118-175 states that if a dwelling is your main residence and another dwelling is the main residence of a child of yours who is under 18 and is dependent on you for economic support, you must choose one of them as the main residence of both of you. Application to your circumstances On an objective assessment of all the relevant circumstances, it is arguable that the Property has been the Taxpayer's main residence since XX February 20XX (including the period up to XX May 20XX during which he was a non-resident). This is on the basis that: • the Taxpayer first moved into the Property on XX February 20XX with his daughter and parents;
• the Taxpayer has not owned another property in Australia during this period and has stayed at the Property whenever in Australia. That is, up to XX May 20XX the Taxpayer stayed at the Property approximately 40% of the time and spent less time at any other one location in a foreign country as a consequence of his business travels, and since XX May 20XX the Taxpayer has stayed at the Property on a permanent basis; • phone/internet and all utility services have been connected to the Property since XX February 20XX and linked to accounts in the Taxpayer's name; and • since XX February 20XX, other relevant records of address, as recorded on the Taxpayer's driver licence and bank statements etc., refer to the Property. In any event (i.e. in the event that the Taxpayer had a main residence other than the Property for the period XX February 20XX to XX May 20XX), pursuant to the application of section 118-175, the Taxpayer is able to choose the Property as his main residence for that period. This is on the basis that: • the Property has been the main residence of his daughter since XX February 20XX;
• the Taxpayer's daughter remains under the age of 18; and • the Taxpayer's daughter is dependent on the Taxpayer for economic support. CGT event A1 under section 104-10 will happen to the Taxpayer at the time he enters into the contract for the disposal of the Property and that CGT event will happen at the time the Taxpayer is a resident of Australia. As submitted by the Taxpayer, the Property - a 'dwelling' for the purposes of Subdivision 118-B - was not his main residence from the date of its acquisition (on XX August 20XX) until XX February 20XX. As the Property was not the Taxpayer's main residence throughout his ownership period, any capital gain realised by the Taxpayer (under subsection 104-10(4)) from the disposal will not be disregarded pursuant to section 118-110. However, as the Property was the Taxpayer's main residence for part only of his ownership period, any capital gain realised by the Taxpayer (under subsection 104-10(4)) from the disposal will be partially disregarded pursuant to section 118-185.
As the Property either was the Taxpayer's main residence from XX February 20XX or (pursuant to section 118-175) can be chosen to be his main residence from XX February 20XX, for the purposes of calculating the capital gain from the disposal in accordance with the formula in subsection 118-185(2) the non-main residence days ended on XX February 20XX.