Often, the ability to access the CGT main residence exemption is treated as a given when a person is selling their home.  However, recent cases illustrate that the Commissioner 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.  If you do not hold documents dating back to when you first moved into your home, you could be the subject of the current ATO review and audit program on the main residence exemption.

In many cases, substantial capital gains can be realised from the sale of a main residence.  The disallowance of the main residence exemption could result in significant and unexpected amounts of tax being payable.

Main residence exemption

Generally under the capital gains tax (“CGT”) main residence exemption, a capital gain you make from a CGT event in relation to a property is exempt where you are an individual and the property was your main residence throughout your ownership period.

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 when claiming the main residence exemption.  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.

Obtaining the documentation needed to prove that you have occupied a property throughout a continuous period can be challenging, especially when that period could stretch for 10 years or more.

Recent cases

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 activity

The ATO has developed data-matching capabilities specifically targeting property sales.  The ATO 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.

In the most recently released ATO compliance program, the ATO have indicated that they have received additional funding to expand and improve their data matching systems and capabilities, including in relation to property sales.

Where a gain is treated as being subject to 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.  Unsurprisingly, obtaining documentation from a substantial number of years ago has proved challenging for some of the people involved in these reviews and audits.

What records should you hold

To reduce the chances of triggering an ATO review for the main residence exemption, the easiest thing to do is to ensure that government data for your home address is up-to date and consistent, especially when you have just moved into a property.  This data would include address changes for driver licences, motor vehicle registration, electoral roll, as well as for other government contacts such as Medicare and the ATO.

Where you may be 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:
    • electricity
    • water
    • gas
    • telephone
    • internet
  • change of electoral roll details to the address of the property
  • change of driver licence address to the proper
  • motor vehicle insurance indicating that a vehicle registered in your name is parked at the property
  • personal mail addressed to the property

There is no set list of documentation that is guaranteed to satisfy the ATO of the fact that a property was your main residence.  However, if you hold a combination of different types of supporting documentation, it would be expected that this would carry more weight.

The move to electronic billing and notices for utilities and some government functions is making keeping these records easier as many are now already sent out in an electronic form, allowing bulky paper record keeping to be avoided.

Where your intended application of the main residence exemption is more complex and/or the amount of 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.

1Keep and Commissioner of Taxation [2013] AATA 709