James Keep and Commissioner of Taxation

[2013] AATA 709

[2013] AATA 709 

Division	TAXATION APPEALS DIVISION
File Number(s)	2013/1703
Re	James Keep
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Senior Member C R Walsh
Date	26 September 2013
Place	Perth

Decision Summary

The Tribunal affirms the decision under review.

...(Sgd) C R Walsh.........................

Senior Member C R Walsh

Catchwords

Income tax – capital gains tax – main residence exemption – whether house became applicant’s main residence as soon as practicable after the completion of its construction – whether house continued to be applicant’s main residence for at least 3 months - decision under review affirmed

Legislation

Income Tax Assessment Act 1997 (Cth) – Subdivision 118-B ) –  s 118-150(3)

Taxation Administration Act 1953 (Cth) – s 14ZZK(b)(iii)

Cases

Case 26/93 93 ATC 320
Erdelyi v Commissioner of Taxation [2007] AATA 1388; 2007 ATC 2214

Jones v Dunkel (1959) 101 CLR 298

REASONS FOR DECISION

Senior Member C R Walsh

26 September 2013

INTRODUCTION

1. A capital gain of $114,675 on the sale of a property in Scarborough, Western Australia (Property) was included as income in Mr Keep’s notice of assessment for the year ended 30 June 2006 (Assessment).  The capital gains tax (CGT) payable on that gain was stated as being $42,500.50. 

2. Mr Keep disputes the inclusion of the capital gain in his income for the 2006 year on the basis that he is entitled to the CGT exemption for main residence in Subdivision 118-B of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) (Main Residence Exemption). 

3. The capital gain was calculated based on a sale price of $703,000 and a cost base of $244,300.  The gross capital gain was $458,700 and Mr Keep’s share was $299,350.  As an individual, Mr Keep was entitled to a 50% discount on the capital gain, making his net capital gain on disposal of the Property $114,675.

4. Mr Keep objected to the Assessment on 29 January 2013 (Objection) and the Objection was disallowed on 6 March 2013 (Objection Decision).  Mr Keep applied to the Tribunal for a review of the Objection Decision on 16 April 2013.

5. The Objection Decision also disallowed Mr Keep’s objection to the penalty assessment issued to him in respect of the 2005/2006 year for the amount of $31,875.35.  However, on 23 August 2013 the Commissioner determined to allow Mr Keep’s objection to the penalty assessment in full.  Consequently, the only remaining issue for determination by the Tribunal is whether the Assessment is excessive and, in particular, whether Mr Keep is exempt from CGT on his share of the gain on the disposal of the Property under the Main Residence Exemption.

Recalculation of the capital gain

1. Before the hearing of this application, Mr Keep provided the Commissioner with documentary evidence of certain construction, holding and sale costs which he incurred in relation to the Property but which were not taken into account by the Commissioner in calculating the quantum of the capital gain included in the Assessment. 

2. Based on this documentary evidence, the Commissioner accepts that the Assessment is excessive to the extent that the amount on which Mr Keep is liable to pay CGT should be reduced from $114,675 to $66,271, calculated as follows. 

Cost Base:

           Purchase price of land

$174,000

Estimated construction, holding and sale costs

$70,300     $263,106

Calculated as follows:

 Construction costs    $246,258

Settlement Fee          $1,182

Advertising                  $200

Selling Fee               $15,466

Water rates                   $810

Total cost base

$244,300 $437,916

Proceeds from disposal of the property

$703,000

Gross capital gain

(proceeds reduced by cost base)

$458,700 $265,084

Applicant’s share of capital gain

$229,350 $132,542

Less any applicable capital losses 

$0

Capital gain prior to discount

$229,350 $132,542

Method used to calculate Applicant’s capital gain

Applicable discount for eligible transactions

Discount method

$114,675  $66,271

Net Capital gain

$114,675  $66,271

MAIN RESIDENCE EXEMPTION

1. To prove that the Assessment is excessive by reason of the Mr Keep’s entitlement to the Main Residence Exemption, Mr Keep must establish that the house built on the Property (House):

   (i)became his main residence as soon as practicable after the House was completed; and

   (ii)continued to be his main residence for at least 3 months:  s 118-150(3)(a) and (b) of the ITAA 1997 and s 14ZZK(b)(iii) of the Taxation Administration Act 1953 (Cth).

2. Factors relevant to determining whether the House was Mr Keep’s main residence for any period include:

   ·the length of time he lived at the House;

   ·whether he moved his personal belongings into the House;

   ·the address to which he had his mail delivered;

   ·the connection of services, such as gas or electricity, to the House; and

   ·Mr Keep’s intention to occupy the House:  see Case 26/93 93 ATC 320 at 322; Erdelyi v Commissioner of Taxation [2007] AATA 1388 at 18.

EVIDENCE & ANALYSIS

1. In summary, the evidence before the Tribunal fails to establish that the House became Mr Keep’s main residence as soon as practicable after the completion of it construction and that the House continued to be Mr Keep’s main residence for at least 3 months after that, as required by s 118-150(3)(a) and (b) of the ITAA 1997.    

1. In his letter to the Tribunal, dated 31 July 2013, Mr Keep states that:

   ·he purchased the Property in July 2002 with his then de facto partner, Ms Tiffany Muggleton. (Mr Keep told the Tribunal that the purchase price of the Property was $174,000);

   ·construction of the House on the Property commenced in April 2004;

   ·his relationship with Ms Muggleton ended in September 2004;

   ·in approximately May or June 2005, he physically moved into the House with Ms Muggleton “as friends (no longer in a relationship) to enable us to meet the requirements to sell the property without being subject to Capital Gains Tax”;

   ·in September 2005 he moved out of the House and went to live with his sister, and her then partner, at their home in Queensland (Queensland address);

   ·in November 2005 Mr Keep and Ms Muggleton sold the House for $703,000;

   ·on 23 December 2005 Mr Keep left Australia “with a 3 week open (return) ticket, met [his] (now wife) and re-settled in the UK”; and

   ·in February 2006 he determined that Ms Muggleton and his sister’s former partner had developed a relationship and established their home at the Queensland address, at which time all contact with Muggleton ceased.

2. In an email to the Australian Taxation Office, dated 27 February 2013, Mr Keep said that he moved out of the House in the first week of September 2005.  As such, Mr Keep’s own evidence leaves open the possibility that he lived in the House for a period of less than 3 months, namely from the second week in June to the first week of September 2005.

3. Mr Keep has not provided any 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, as required by s 118-150(3)(a) of the ITAA 1997.  Further, there is no evidence of any gas or electricity accounts for the House in Mr Keep’s name. 

4. Although Mr Keep claims that he moved his personal belongings into the House, when he moved into it in about May or June 2005, the evidence before the Tribunal indicates that Mr Keep’s main residence was at the Queensland address (and not the House) from at least the time of his separation from Ms Muggleton in September 2004. 

5. Mr Keep told the Tribunal that although he couldn’t recall the precise date that he moved to the Queensland address, it is likely to have been on about 9 September 2005 for the reason that he recalls being involved in a serious car accident in Queensland in mid-September 2005, which was only a few days after he had moved there.

6. Mr Keep’s evidence was that from some time in 2002, until he moved to the Queensland address in September 2005, he worked as a mine worker on a fly-in fly-out basis.  He said that he spent two weeks working away and then had one week off.  Prior to moving into the House, Mr Keep said that he sometimes spent his one week off at the Queensland address, rather than at the rental property he then shared with Ms Muggleton in Innaloo, Western Australia.  From the time that he allegedly moved into the House (in about May or June 2005) until he moved to the Queensland address in September 2005, Mr Keep continued to work two weeks away and then had one week off.

7. In October 2004 Mr Keep redirected his mail to the Queensland address.

8. In December 2004 Mr Keep obtained a Queensland driver’s licence and, on that licence, nominated the Queensland address as his residential address.

9. Mr Keep’s income tax return for the 2004/2005 year nominates the Queensland address as his home address.

10. In support of his application, Mr Keep produced various rates notices, settlement statements and a settlement agent’s invoice relating to the Property.  However, for the following reasons, the Tribunal finds that these documents fail to establish that the House continued to be Mr Keep’s main residence for at least 3 months, as required by s 118-50(3)(b) of the ITAA 1997:

    ·the Water Corporation Annual Service Account, dated 1 July 2005, is addressed to Mr Keep and Ms Muggleton at the property they rented together in Innaloo, Western Australia prior to and during the construction of the House;

    ·the Statement of Account from the Water Corporation, for the period 1 July 2006 to 18 March 2013, does not state an address, but refers only to the property to which the account relates (i.e. the Property);

    ·the City of Stirling rates notice, dated 25 July 2005, is addressed to Mr Keep and Ms Muggleton at the address of the Property, but does not evidence anything more than that the City of Stirling used the rated property address in directing the rates notice;

    ·the Contract for the Sale of the Property, and the Disclosure Statement annexed to that contract, also refer to the Property address as Mr Keep’s address, however these documents were executed by Mr Keep on 10 and 9 November 2005 respectively, being approximately 2 months after Mr Keep, on his own evidence, ceased to reside in the House;

    ·the 3 Statements of the settlement agents, Currie & Reeves, dated 21 November 2005, 19 December 2005 and 4 January 2006 respectively, relating to the sale of the Property, do not bear the address of the Property; and

    ·the settlement agent’s (Currie & Reeve’s) undated Tax Invoice appears to have been attached to the Statement dated 21 November 2005, after Mr Keep, on his own evidence, ceased to live at the House.

11. Mr Keep told the Tribunal that during the period that he allegedly lived in the House with Ms Muggleton he shared the utility and other bills relating to the House with Ms Muggleton on a 50/50 basis.  However, Mr Keep did not provide any documentary evidence (e.g. bank statements) of his contribution towards these bills.  He said that he was unable to do so because he simply gave Ms Muggleton cash for his share of the bills.

12. Mr Keep also told the Tribunal that about $70,000 in construction costs is missing from the cost base used by the Commissioner to calculate the capital gain on the disposal of the Property.  However, Mr Keep did not produce any documentary evidence of these additional construction costs.  In any event, this is irrelevant to the question for determination by the Tribunal, namely whether Mr Keep is entitled to the Main Residence Exemption on his share of the capital gain on disposal of the Property.

13. The Tribunal considers that the unsigned statement of Mr Keep’s sister, Ms Lucy Keep (dated 29 July 2013), the signed statement of Mr Keep’s friend, Ms Kristen Sinanian (dated 14 July 2013), and the signed statement of Mr Keep’s father, Mr Christopher Keep (dated 17 July 2013), do not have any probative value in the absence of those witnesses giving oral evidence at the hearing of this application. 

14. In any event, in their respective statements Ms Keep and Ms Sinanian say only that Mr Keep lived in the House for “approximately three months”, which is insufficient to satisfy the requirement in s 118-150(3)(b) of the ITAA 1997 that the House continued to be Mr Keep’s main residence for at least 3 months.

15. Mr Christopher Keep’s evidence is of no assistance in positively proving that the House was Mr Keep’s main residence at any time as he says only that “I have no reason to disbelieve that James didn’t live in the property.”

16. Mr Keep told the Tribunal that he had not produced any evidence from his former de facto partner, Ms Muggleton, in relation to the House since he had not spoken to her for a long time and wanted nothing to do with her.  It is open to the Tribunal to draw an inference from Mr Keep’s failure to call evidence from Ms Muggleton that her evidence would not assist him to prove the House continued to be his main residence for a period of at least 3 months after the House was constructed:  Jones v Dunkel (1959) 101 CLR 298.

DECISION

1. For the above reasons, the Tribunal affirms the Objection Decision.

1.          I certify that the preceding 27 (twenty seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member C R Walsh.

....(Sgd) T Freeman........................

Associate

Dated 26 September 2013

2.          Date(s) of hearing	3.          19 September 2013
4.          Representative for the Applicant	5.          Self-represented
6.          Counsel for the Respondent	7.          Ms F Vernon