The tax law contains exemptions from capital gains tax (CGT) for a person’s principal or main residence. But, as always, it’s not as simple as it sounds. The rules can be tricky to understand.
The Administrative Appeals Tribunal (AAT) recently upheld the Tax Commissioner’s decision denying a man’s claim for the CGT main residence exemption in relation to a disposal of a property he claimed was his home.
The issues revolved around whether the house became the man’s main residence as soon as practicable after the completion of its construction, and whether the house continued to be his main residence for at least three months after that (as the law requires in order to get the CGT exemption).
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The man submitted that he had purchased land in July 2002 for $174,000 with his then de facto partner. The construction of the house commenced in April 2004; however, his relationship with his then partner ended in September 2004. In approximately May or June 2005, he and his then ex-partner moved into the house “to enable us to meet the requirements to sell the property ‘without’ being subject to CGT”. In the first week of September 2005, the man moved out of the house and went to live with his sister in Qld, and in November 2005, the house was sold for $703,000. On December 23, 2005, the man told the AAT that he left Australia “with a three week open (return) ticket, met [his] (now wife) and resettled in the UK”.
A net capital gain of $114,675 on the sale of the property was included as income in the man’s tax assessment for the 2006 income year. He disputed the inclusion of the capital gain in his income for the 2006 year on the basis that he was entitled to the CGT main residence exemption. Before the hearing, the man provided the Commissioner with documentary evidence of certain construction, holding and sale costs, which the Commissioner accepted – this reduced the net capital gain to $66,271.
The AAT held the evidence before it failed to establish that the house became the man’s main residence as soon as practicable after the completion of its construction and that the house continued to be the taxpayer’s main residence for at least three months after that, as required by the relevant tax law.
The Tribunal noted an email the taxpayer had sent to the ATO which indicated that he had moved out of the house in the first week of September 2005, which left open the possibility that he lived in the house for a period of less than three months (i.e. from the second week in June 2005 to the first week of September 2005). The Tribunal also noted the taxpayer had not provided evidence (such as a Certificate of Occupancy, the date that final building inspection approval was granted or any “hand-over” documents from the builder) that the house became his main residence “as soon as practicable” after the completion of the house. Further, it noted there was no evidence of any gas or electricity accounts for the house in the taxpayer’s name.
Although the man claimed he moved his personal belongings into the house when he moved into it in about May or June 2005, the Tribunal said the evidence indicated his main residence was at his sister’s home in Queensland (and not the house in question) from at least the time of his separation from his ex-partner in September 2004. Other factors noted by the Tribunal included:
- from 2002 to September 2005, the man worked as a mine worker on a fly-in fly-out basis which involved working two weeks on and one week off;
- in October 2004, the man redirected his mail to the Queensland address;
- in December 2004, the man obtained a Queensland driver’s licence (which nominated the Queensland address as his residential address); and
- in the man’s 2004-05 tax return, he nominated the Queensland address as his home address.
Accordingly, the AAT held that the man had failed to discharge the burden of proof that the assessment should not have been made or should have been made differently.
In this particular case, the tax laws surrounding the CGT main residence exemption were relatively straightforward, but the individual in the case simply could not prove to the satisfaction of the AAT that the Tax Commissioner was wrong and that he qualified for the exemption.
For those wanting to know more about how CGT works, including the main residence exemption, the forthcoming Thomson Reuters CGT Guide for SME Practitioners is a very helpful guide. Among other things, it explains how CGT rules are applied to transaction-based issues, and contains useful tips, warnings and checklists. For details, see the Thomson Reuters website.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.