A number of recent cases have brought into question the ability to qualify for the capital gains tax main residence exemption.
Most homeowners would be aware that the main residence exemption allows the capital gains or losses arising from the sale of a property to be exempt from tax, provided that you are an individual and the property was your main residence throughout your ownership period.
Few people, however, are aware of the documentation required to ensure that they meet the exemption requirements.
The Australian Taxation Office (ATO) has started to request significant evidence from taxpayers to prove that a property was their main residence throughout the ownership period. As is the case for tax matters generally, the burden of proof rests with the taxpayer. Thus, if the matter is disputed by the ATO, it will be necessary to prove that you have lived in a property to which the main residence exemption is being applied for the duration of the ownership period. This can prove challenging, especially when that period stretches for 10 years or more.
Recent cases illustrate that the Commissioner of Taxation can, and will deny, the main residence exemption where people cannot provide sufficient evidence to show that they lived in their home for the entire period claimed.
For many homeowners this could result in a significant and unexpected tax liability.
In a recent case1, a taxpayer (Mr Keep) had his claim for the main residence exemption disallowed because he could not prove that a property was his main residence for the stated period of time.
Before the Administrative Appeals Tribunal, Mr Keep submitted a number of forms of evidence in an attempt to demonstrate that he had lived in the property. However, the Tribunal was not satisfied that the evidence proved that the property had been his main residence.
As a result of not being able to access the main residence exemption, Mr Keep was assessed on an additional $66,271 of taxable income.
ATO reviewing property sales
The ATO has developed data-matching capabilities specifically targeting property sales. It has access to a range of data held by other government organisations, which are sufficient to match property sales data to government held residential address information.
Where a gain is treated as being exempt under the main residence exemption and government address data is incomplete, inconsistent, or suggests that a person may have lived at another property, the ATO may begin investigative action.
William Buck has been engaged by various taxpayers to assist with a number of ATO audits and reviews where the Commissioner has requested proof of eligibility for the main residence exemption. In some cases, supporting documentation for occupancy of a property has been requested going back as far as the 1990’s.
What records should you hold
To reduce the chances of triggering an ATO review, the easiest thing to do is to ensure that government data for your home address is up-to date and consistent, particularly when you have just moved into a property. This data includes address changes for drivers licences, motor vehicle registration, electoral roll, as well as for other government contacts such as Medicare and the ATO.
If you are looking to utilise the main residence exemption, you should also consider retaining additional documents to support your claim. Such documents could include a combination of:
- sample of utilities bills (e.g. a couple of examples from each year) such as:
- change of electoral roll details to the address of the property
- change of drivers licence address to the property
- motor vehicle insurance indicating that a vehicle registered in your name is parked at the property
- personal mail addressed to the property
Where your intended application of the main residence exemption is more complex and/or the amount of the gain is large, the level of ATO interest is likely to increase. In these circumstances you should consider holding a higher level of documentation to prove the period of time you occupied your home.
If you have any queries about the main residence exemption, please contact your local William Buck advisor.
1 Keep and Comissioner of Taxation  AATA 709