How to keep a home capital gains tax free?

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How to keep a home capital gains tax free when building, repairing or renovating, 03 December 2013


By Anthony J Cordato, Business and Property Lawyer, Cordato Partners Lawyers

Building, repairing or renovating a home has a special place in Australian tax law because the home can be treated as owner-occupied before the work is finished, even though it is unoccupied.


In technical terms, the main residence exemption from capital gains tax is able to be extended to cover the period before the building, repair or renovation work on the property is finished.


This is known as the construction concession. It is available in situations where a new home is built on vacant land, where an old house is knocked down and rebuilt, and where the owner moves out during a repair or renovation.


Three Administrative Appeal Tribunal (AAT) decisions are examined in this article. In each, the rules for the construction concession were not followed and capital gains tax was payable on the proceeds of sale.


The construction concession — building, repairing or renovating a dwelling as a main residence

The law on the main residence exemption is found in s 118-100 to 118-265 in Subdiv 118-B of the Income Tax Assessment Act 1997 (ITAA 1997). This is a summary:


You can ignore a capital gain … you make from a CGT event that happens to a dwelling that is your main residence.

ITAA 1997 requires the owner to be in occupation of the main residence to be capital gains tax free, but does allow the main residence exemption to be extended in some instances.


Section 118-150 is one instance. It allows for the main residence exemption to be extended until building, repair or renovation work is finished.


Section 118-150 contains a four-year time limit for the owner to move in. If it is land, or a house to be demolished, the time limit is four years after the date of settlement of the purchase/transfer of title. If it is an existing dwelling to be repaired or renovated, the time limit is four years after the moving out date.


Section 118-150(3) contains para (a) and (b) with these requirements:

(a) the moving in quickly requirement — the owner must move into occupation of the house as soon as practicable after the construction work is finished, and

(b) the occupation requirement — the owner must then continue to occupy the house as their main residence for at least three months.



Unless both requirements are satisfied, the construction concession is not available. Therefore capital gains tax would be payable on the increase in value before the date the owner moves in.


If the taxpayer already has another principal place of residence, then they must choose between that residence and the new residence, which one is to be their main residence for capital gains tax purposes.


Recently, the AAT has ruled on para (b), to add to two earlier rulings it has made on the construction concession. The AAT interprets the requirements strictly.


The moving in quickly requirement — s 118-150(3)(a)

In the decision of Summers v FC of T 2008 ATC ¶10-007, the AAT ruled that the taxpayer had not moved in as soon as reasonably practicable.


The facts were that Gail Summers settled on the purchase of vacant land in Kallista, Victoria on 1 November 1996. She contracted to build a dwelling on the land in June 2002. She terminated the building contract in September 2002, before the dwelling was built. Four months later, in January 2003, she took up occupation of a two-room shed on the property which the builder had built for storage and a lunch room. It had mains water and a toilet connected. After four months, she moved out, and later on, sold the property.


The AAT ruled that she had not “moved in as soon as practicable” because she had delayed four months. The AAT found that Summers had no intention of living in the shed in September 2002, and that she moved in January 2003 only after a disagreement with the person with whom she shared rental accommodation. The AAT noted Summer’s “unusual working and living habits” — such as buying all meals (no need for a kitchen) and showering at work (no need for a shower), and ruled that the shed could be treated as her main residence by Summers from the date she moved in, even though it was rudimentary in terms of living conditions.


The consequence of the failure to comply with the moving in quickly requirement was harsh. Summers was unable to use the construction concession for the four years preceding January 2003, during which time the value of the property rose substantially. The main residence exemption was available to her because she occupied the property for a minimum of three months, but only from January 2003. The AAT calculated that a net capital gain of $64,858 from the sale of a property was to be included as taxable income.


The occupation requirement — s 118-150(3)(b)

In the decision of Keep v FC of T [2013] AATA 709, the AAT ruled that there was insufficient evidence of occupation for either the construction concession or the main residence exemption to be available.


The facts were that James Keep bought the land in Scarborough, Western Australia in July 2002 and commenced construction of a house in April 2004. According to Keep, he moved in when the house was finished in May or June 2005, and moved out in early September 2005 to live with his sister in Queensland. The house was sold in November 2005.


Keep’s share of the net capital gain was $132,542, which after applying the 50% discount, became $66,271 to be included as taxable income.


The AAT ruled that Keep had not proved he moved into or occupied the house as a main residence. The AAT considered these factors —

• Length of time — Keep’s own evidence was that he lived in the house “approximately three months”, which was not “at least three months”

• Mailing address — Keep’s driver’s licence, tax return for 2004/05 and mailing address during the relevant period (June to September 2005) nominated his sister’s address in Queensland as his residential address

• Personal belongings — These remained in his sister’s house in Queensland

• Services — No utility bills addressed to Keep at the house address were produced. Council Rates and Water Rates Notices which had property address were of little value, and documents created on the sale with the property address were afterthoughts

• Intention to occupy — Keep worked as a fly-in fly-out mine worker. He was away from the house in the two weeks he worked and had no proof that he was living at the house in the one week off

• Supporting evidence — Keep did not obtain a statement from his former de facto partner (they separated in September 2004) who was a joint owner and who he said cohabited in the house “as friends” from June to September.



As a consequence, neither the construction concession nor the main residence exemption was available and capital gains tax was payable.


The Keep decision fleshes out the AAT decision of Erdelyi & Anor v FC of T 2007 ATC 2214 in which the AAT ruled that the occupation requirement was not satisfied because the taxpayers had not occupied the house as their main residence.


The relevant facts were that the house had been built to lock-up stage, and landscaping and swimming pool work were in progress; only basic furnishings and household items had been moved into the house; most of their furniture and personal belongings remained at the house they had been living in; there was no refrigerator or washing machine; they used the toilet and shower, but not the kitchen stove (which was missing the top plates); electricity was connected but usage of $10 per month demonstrated minimal usage; and no evidence was provided of mail delivery, or of notifying relevant authorities or institutions of the change of address.


Conclusion

The devil is in the detail.


When building, repairing or renovating a house which is intended to be used as a main residence, it is necessary:

(a) to move in as soon as practicable after the work is completed, and

(b) to occupy the house as a main residence for at least three months



to take advantage of the construction concession from capital gains tax.


Proper records must be kept because the onus of proof is on the taxpayer.