Chapman and Commissioner of Taxation
[2008] AATA 421
•21 May 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 421
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/4814
TAXATION APPEALS DIVISION ) Re Kevin Chapman Applicant
And
Commissioner of Taxation
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date21 May 2008
PlacePerth
Decision The Tribunal affirms the decisions under review. ..............[Sgd Mr A Sweidan]............
Senior Member
CATCHWORDS
Capital Gains Tax- Main residence exemption- whether taxpayer entitled to exemption where property not occupied by the taxpayer- whether reasonable care taken by taxpayer in income tax return
LEGISLATION-
Income Tax Assessment Act 1997 s118-110; s118-135; CGT Determination No. 51
REASONS FOR DECISION
21 May 2008
Mr A Sweidan, Senior Member
Background
1. Applicant seeks a review of the Commissioner’s decision disallowing objections to an amended income tax assessment for the year ended 30 June 2005 and an assessment of penalty
2. The relevant facts are not in dispute and are set out below.
THE ISSUES FOR THE TRIBUNAL ARE
3. Whether the capital gain made by the applicant on the disposal of 40 McKenzie Way, Embleton (“the property”) a suburb of Perth, should be disregarded pursuant to section 118-110 of the Income Tax Assessment Act 1997 (the Act) because the property should be considered to be the main residence of the applicant for the entire ownership period.
4. Whether the property should be considered to be the applicant's main residence from the time the property was acquired in accordance with section 118-135 of the Act because it should be considered that he moved into the dwelling by the time that it was first practicable to do so.
5. Whether the property became the applicant's main residence prior to 23 September 2003.
6. If the applicant has an assessable capital gain, whether:
6.1The applicant or his agent took reasonable care in failing to declare the income derived by the applicant being the capital gain on the disposal of the property;
6.2The Commissioner should have used his discretion under section 298-20 of the Taxation Administration Act 1953 ("the Administration Act"), Schedule 1 to remit all or part of the penalty.
FACTS
7. The applicant purchased the property in June 2001 with settlement occurring on 25 June 2001.
8. At the time of purchase of the property, applicant worked at Kalgoorlie, approximately 600 kilometres from the property.
9. Immediately after settlement, the property was rented to the vendors of the property. Applicant stated that after purchasing the property the existing owners enquired whether they could rent it back for six months while their home was being completed. The applicant said that at the time it seemed a reasonable request to assist them.
10. At the end of the six months, applicant rented the property to other tenants.
11. The 2002 and 2003 income tax returns of the applicant show that the property was first rented on 22 June 2001 and that the property was rented for 48 weeks in 2002 and 52 weeks in 2003.
12. The applicant was unable to show on what date he actually moved into the property. Based on the evidence provided by applicant, the respondent treated the taxpayer as having moved into the property on 23 September 2003. This date is not disputed by the applicant.
13. The applicant said that although his intention at the time of purchase was to move from Kalgoorlie to Perth and occupy the property as his main residence following settlement he did not do so because:
12.1 He was informed by his employer that he could not be transferred to Perth;
12.2 If he had left his employment and moved to Perth he would have had to reimburse his employer for re-location expenses incurred when he moved to Kalgoorlie; and
12.3 He did not have the money to do so at that time.
14. He continued living in Kalgoorlie until September 2003.
15. The applicant subsequently re-sold the property on 20 August 2004 with settlement occurring on 1 September 2004. He derived a capital gain on the disposal of the property.
16. Applicant lodged his income tax return for the year ended 30 June 2005 electronically through his tax agent on 11 April 2006. A capital gain was not declared in this income tax return.
RELEVANT LEGISLATION
17. ss. 118-110(1) of the Act 1997 (Assessment Act) states:
“118-110 Basic Case
(1) A *capital gain or *capital loss you make from a
*CGT event that happens in relation to a *CGT
asset that is a *dwelling or your *ownership interest
in it is disregarded if:(a) you are an individual; and
(b) the dwelling was your main residence
throughout your *ownership period; and
(c) the interest did not *pass to you as a beneficiary
in, and you did not *acquire it as trustee of, the
estate of a deceased person.”
18. However, where the dwelling is not used as the taxpayer’s main residence throughout the ownership period, only a partial exemption is available. S. 118-185 of the Act states:
“118-185 Partial exemption where a dwelling was your
main residence during part only of ownership period
(1) You get only a partial exemption for a *CGT event
that happens in relation to a *dwelling or your
*ownership interest in it if:(a) you are an individual; and
(b) the dwelling was your main residence for part
only of your *ownership period; and
(c) the interest did not *pass to you as a beneficiary
in, and you did not *acquire it as a trustee of,
the estate of a deceased person.
(2) You calculate your *capital gain or *capital loss
using the formula: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 this Subdivision.
Non-main residence days is the number of days in
your *ownership period when the dwelling was notyour main residence.
19. If a dwelling is not the taxpayer’s main residence for the entire period of ownership because there was a delay in moving into the dwelling, s. 118-135 of the Act may apply to treat the dwelling as the main residence from when it was acquired.
20. s. 118-135 of the Act states:
“118-135 Moving into a dwelling
If a *dwelling becomes your main residence by the time it was first practicable for you to move into it after you *acquired your *ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence."
TRIBUNAL’S FINDINGS
21. The Tribunal is of the view that the applicant is not entitled to the full main residence exemption under s 118-110 of the Act because by his own admission the property was not the applicant's main residence throughout the applicant's ownership period.
22. In the Tribunal’s opinion it is clear that applicant did not move into the residence by the time it was first practicable to do so after the property was acquired. Accordingly, notwithstanding applicant’s assertions to the contrary, s 118-135 of the Act does not apply to treat the property as the applicant's main residence from the time of acquisition.
23. The evidence shows that applicant acquired the property and was legally entitled to move into it immediately after settlement on 25 June 2001. applicant chose to rent the property out. The applicant's evidence is that the vendors of the property asked that they be able to rent the property back for 6 months while their home was being completed and he agreed to do so.
24. Including the initial 6 months applicant chose to rent the property out for a total period of approximately two years before he moved into it.
25. Applicant asserts that the respondent’s CGT Determination No. 51 supports his claim that the property should be treated as his main residence for the period from when he acquired it until he moved into the property. He particularly relied on paragraph 2(vii) of the Determination which states that a relevant factor in determining whether a dwelling is a taxpayer’s sole or principal residence is “the taxpayer’s intention in occupying the dwelling”
26. The Tribunal finds that the Determination does not support the applicant's case and if anything it points to the fact that the property should not be considered to be the applicant's main residence during the relevant period that it was not occupied by him, having regard to the fact that on his own evidence none of the tests set out in paragraphs 2(i) to (vii) of the Determination can be answered in his favour.
27. CGT Determination No. 51 makes it clear that whether a dwelling is a person's sole or principal residence depends on the facts in each case. It lists some factors that may be relevant and points out that this is not an exhaustive list and also points out that the weight to be given to the listed factors depends on the circumstances of the particular case. Paragraph 3 of the Determination also states that "mere intention" to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption.
28. The Tribunal finds on the applicant’s evidence that while he had an intention to move into the property at some time he only moved into it when it became convenient for him to do so. The Tribunal is of the view that this does not fit within the Determination and falls far short of the requirements of s 118-135 of the Act.
29. In the Tribunal’s view the words "the time it was first practicable" should not be read down to mean "the time it was first convenient".
30. The Tribunal notes that the Explanatory Memorandum to the Bill which became the Tax Law Improvement Act (No. 1) 1998 states that s 118-135 was intended to apply to extend the main residence exemption to take into account the time needed to move into a dwelling. The memorandum states that it takes account of situations where, for example, there is a delay in moving in because of illness or other reasonable cause. It also states that the exemption does not extend to cases where an individual is unable to move into the dwelling because it is being rented out.
31. In the Tribunal’s opinion the applicant has not shown any reasonable cause for his delay in occupying the property.
32. The Tribunal accordingly finds that the capital gain was correctly calculated by the respondent in accordance with s 118-185 of the Act to allow partial exemption on the gain on the property. The calculation was based on treating the property as the applicant's main residence from 23 September 2003.
33. The Tribunal finds that the calculation made by the Commissioner is correct and that it correctly takes into account the period that the property was the applicant's main residence.
34. The applicant has not provided any evidence to show that he occupied the property at a date prior to this. The Tribunal finds that the applicant has not discharged the burden of proving that the assessment is excessive in this regard.
PENALTY
35. The Tribunal finds that the penalty imposed in the assessment notice dated 16 May 2007 has been correctly imposed.
36. s 284-75 of the Taxation Administration Act, Schedule 1 (TAA) states that a taxpayer is liable to an administrative penalty if the taxpayer or his agent makes a statement that is false and this results in a shortfall amount.
37. The level of penalties is set out in the table in s 284-90 of the TAA.
38. Item 3 of that table stipulates that, if the shortfall amount resulted from the failure of the taxpayer or his agent to take reasonable care to comply with a taxation law, the penalty is 25% of the shortfall amount.
39. The Commissioner has the discretion under s 298-20 of the TAA to remit the penalty in part or full.
40. The Tribunal is of the view that the applicant did not satisfy his obligation to take reasonable care simply by using the services of a tax agent. It remained the applicant's responsibility to properly record matters and draw all relevant facts to the attention of his tax agent relating to the sale and use of the property during the period of ownership. It is unclear whether the taxpayer provided the relevant information to his tax agent.
41. The standard of care required from tax agents is higher than that expected of an ordinary taxpayer due to the agent’s knowledge, education, skill and experience. Given that the applicant used the property to derive assessable income from the date he acquired the property until the date he occupied it as his main residence, a period of approximately 2 years, it is in the Tribunal’s view reasonable to expect that the applicant's tax agent should have inquired as to the position, in which event the agent would have been aware that the applicant was not entitled to the full main residence exemption. Alternatively, if the tax agent or the applicant was in doubt as to the tax position a private ruling could have been sought before the taxation return was lodged.
42. The Tribunal is of the view that the applicant and/ or his agent failed to take reasonable care by failing to return the capital gain and that accordingly the penalty has been correctly imposed.
43. In the Tribunal’s opinion the circumstances do not warrant any remission of the penalty.
44. The Tribunal finds that the applicant has not discharged the burden of proof under s 14ZZK of the TAA to show that the penalty assessment is excessive.
DECISION
45. The Tribunal affirms the decisions under review.
I certify that the 45 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: ................[Sgd Ms C Skinner]...............................
Associate
Date/s of Hearing 8 April 2008
Date of Decision 21 May 2008
Applicant’s Representative Mr Rodney WesternRespondent’s Representative Mr Frank Maloney
Australian Taxation Office
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