A Lesson In Planning Ahead To Avoid ATO Conflicts
Even when the decision is made by an authority such as the ATO, you shouldn't simply accept an adverse and factually incorrect assessment.
A client purchased a property in Sydney in early 2014 with the intention to be an owner-occupier but due to financial constraints rented it out for a brief period in late 2014 and early 2015 before moving the family in and undertaking renovations. The Property was the only one the client owned at the time. When it was sold in May 2017 the client expected that she would not pay capital gains tax as it was her family home; the primary residence exemption would most certainly apply! The ATO, however, didn’t agree – at least for a short time!
The primary residence exemption means that home owners do not pay capital gains tax if they can establish that the dwelling is their main residence. Most people wouldn’t even consider there to be a risk that tax would apply if they sell their family home. In Sydney, where most property prices sky rocketed between 2014 and 2017, capital gains can be quite high therefore the exemption is very important to save those hard earned dollars and allow families to progress through the various stages in their lives.
To get the exemption you not only must have lived at the dwelling, you also need to show evidence of a number of factors that are considered by the ATO when determining whether a property is your main residence or not such as;
- the length of time the taxpayer has lived in the dwelling
- the place of residence of the taxpayer’s family
- whether the taxpayer’s personal belongings have been moved into the dwelling
- the address to which the taxpayer’s mail is delivered
- the taxpayer’s address on the electoral roll
- the connection of services such as telephone, gas and electricity, and
- the taxpayer’s intention in occupying the dwelling.
The exemption doesn’t constrain a taxpayer from renting out that property during a limited intervening time as long as proof can be provided that it was always the intention to live in the property and that during that rental period, no other main residence existed.
As a standard practice, the ATO focuses on the three easiest evidentiary points above, being the address on received mail, connection of utilities and the address on the electoral roll.
The “proof” was the problem in this instance. In situations like this, it can become a little more difficult to meet the burden of proof for the exemption than you may expect if you haven’t taken the time to collect some evidence of your occupancy where there are short period of residence. Although the client had lived at the property from the date it was acquired, during that initial period the utilities were not in her name, her mail still went to an alternative address and the client had not updated the electoral roll. On first pass, and based on the ATO’s standard approach to collecting evidence, there was nothing to support the client having occupied the premises prior to renting out the property.
Shortly after the sale, the client’s accountant informed her that the ATO would not accept the application of a complete main residence exemption and instead she would be hit with an ATO debt based on a capital gain of approximately $100,000. The accountant had informed the client that as she did not have the cash available to satisfy the debt, she had no other choice than to negotiate a payment plan with the ATO.
The client had the good sense to get a second opinion and sought legal advice. The lawyer considered evidence beyond that normally accepted by the ATO and further made submissions to the ATO about why that evidence ought to be considered. This included supporting materials such as the nature of the finance on the property and the form of insurance initially taken out by the taxpayer. After some negotiation the ATO was satisfied that given the evidence provided the application of the exemption was correct and reversed its former decision. The debt was reduced to zero and the dispute resolved.
This case should serve as an object lesson on two fronts. First, that some basic preparation in advance could have avoided the dispute altogether and, second, where a dispute does arise not to always accept an adverse and factually incorrect assessment, even when the decision is made by an authority such as the ATO. There is never harm in getting a second opinion! The right advice can save thousands and often for little cost and time.