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  • Treatment of real estate

    If a dwelling or an interest in a dwelling transfers to you under the marriage or relationship breakdown rollover, your eligibility for the main residence exemption from capital gains tax (CGT) generally takes into account the way in which both of you used the dwelling during your combined period of ownership.

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    Transfers from your spouse on or before 12 December 2006

    If a dwelling or an interest in a dwelling acquired by your spouse on or after 20 September 1985 transfers to you under a CGT event that happened on or before 12 December 2006, and the marriage or relationship breakdown rollover applies, you're entitled to an exemption from CGT when you dispose of it, for the period it was your main residence after the transfer.

    You may only qualify for a partial exemption if:

    • it was your main residence for only part of the period after the transfer
    • you used it to produce assessable income
    • the land on which the dwelling stands is more than two hectares.

    Keep all relevant records making sure you get any records you need from your spouse if you don’t already have a copy.

    See also:

    Transfers from your spouse after 12 December 2006

    If an ownership interest in a dwelling acquired by your spouse on or after 20 September 1985 transfers to you under a CGT event that happens after 12 December 2006, and the marriage or relationship breakdown rollover applies, you take into account the way in which each of you used the dwelling during your respective periods of ownership. This is how you determine eligibility for the main residence exemption on that interest.

    This means you're entitled to a full exemption from CGT when you dispose of the dwelling if the land on which the dwelling stands is two hectares or less, and:

    • during the period your spouse owned the dwelling, it was their main residence and not used by them to produce assessable income
    • during the period you owned the dwelling it was your main residence and not used by you to produce assessable income.

    Partial main residence exemption

    If you don't meet any of the above conditions you may qualify for a partial main residence exemption.

    To work out any partial exemption you calculate your capital gain or loss using the following formula:

    Add the 'Number of days the dwelling was not your spouse's main residence during their ownership of the transferred interest' and the 'Number of days the dwelling was not your main residence during your ownership of the transferred interest'. Divide the total by the 'Number of days in your combined ownership period for the transferred interest', and multiply by the 'Capital gain or loss on the transferred interest'.

    The marriage or relationship breakdown rollover applies only to a transferred ownership interest. If a transfer did not occur on an interest you own, such as circumstances where you had joint ownership of the dwelling prior to the breakdown, you treat that interest under the usual rules for determining the main residence exemption.

    Keep all relevant records making sure you get any records you need from your spouse if you don’t already have a copy.

    Example: Dwelling transferred to you under a CGT event that happened after 12 December 2006 becomes your home

    George and Natalie jointly buy a holiday home on 0.1 hectares of land. The sale settles on 13 March 2012. Two years later, on 13 March 2014, George transfers his half interest to Natalie under the terms of an arbitral award.

    Natalie uses the dwelling as her main residence for three years from the date of the CGT event until she sells it. Settlement is on 13 March 2017 at a sale price of $600,000.

    Natalie's original half interest

    The capital gain on Natalie's original half interest is $100,000 ($200,000 × 50%). Because the dwelling was Natalie’s main residence for three years out of the five years she owned her original half interest, she's entitled to a partial exemption on that interest under the usual formula for a main residence exemption:

    "Divide the 'Number of days in your ownership period when the dwelling was not your main residence' by the 'Total number of days in your ownership period', Multiply the result by the 'Capital gain or loss'."

     That is:

    $100,000 × (730 ÷ 1825) = $40,000

    Transferred interest

    The marriage or relationship breakdown rollover applies only to the half interest transferred from George to Natalie.

    The capital gain on this interest is $100,000 ($200,000 x 50%). In calculating her entitlement to the main residence exemption, Natalie must consider how she and George used that interest during their respective periods of ownership:

     Add the 'Number of days the dwelling was not your spouse's main residence during their ownership of the transferred interest' and the 'Number of days the dwelling was not your main residence during your ownership of the transferred interest'. Divide the total by the 'Number of days in your combined ownership period for the transferred interest', and multiply by the 'Capital gain or loss on the transferred interest'.

    That is:

    730 (George) + 0 (Natalie) ÷ 1825 (combined period) = 0.4

    $100,000 × 0.4 = $40,000

    Natalie's total assessable capital gain for her original interest and the transferred interest is $80,000 ($40,000 + $40,000).

    These calculations do not take into account any additions to the cost base. In working out the cost base of the interest George transferred to her, Natalie adds any relevant costs she incurred after George transferred it to her to the cost base of his interest at the time of the transfer.

    End of example

    See also:

    The ‘home first used to produce income’ rule

    If you use a dwelling as a main residence from the time it's acquired then later used to produce income such as renting it out, sometime after 20 August 1996, the home first used to produce income rule may apply.

    This means the owner is taken to have acquired the dwelling at its market value at the time of first use to produce income.

    If the dwelling or an interest in the dwelling transfers to you under a CGT event that happens after 12 December 2006, and the CGT marriage or relationship breakdown rollover applies to the transfer, you're taken to have acquired it upon its first use to produce income for its market value at that time. The first income-producing use may be during your or your spouse’s ownership period.

    Example: Transfer after 12 December 2006 and ‘home first used to produce income’ rule applies

    Harry buys a house for $200,000 on 17 November 1999. He lives in it as his main residence and doesn't use it to produce income.

    On 1 June 2012, Harry and Anita start living together as husband and wife. Harry moves into Anita’s townhouse and rents out his house. Its value is now $365,000.

    Harry and Anita's relationship breaks down in 2016. Harry gives notice to the tenants that there will not be a renewal on the house.

    On 1 June 2017, Anita moves into the house. Under a binding agreement entered into on the same day, Harry transfers the house to Anita. The CGT rollover applies. Anita also transfers her townhouse to Harry under the agreement.

    Anita is taken to have acquired the house on 1 June 2012 for the market value of $365,000 at the time because:

    • Harry acquired the house after 19 September 1985
    • it was Harry's main residence from the time he became the owner
    • the house became a rental property after 20 August 1996
    • the CGT event under which the house transfers to Anita happened after 12 December 2006 and CGT rollover applied.

    This entitles Anita to a part main residence exemption on the sale of the house.

    Harry would have obtained a full main residence exemption had he sold it just before he began renting it out on 1 June 2012.

    If Anita sells the house under a contract that settles on 1 June 2022 and it is her main residence until that time, she will obtain a 50% exemption. This is because it will have been her main residence for five years from 1 June 2017 to 1 June 2022, out of the 10 years after she is taken to have acquired it.

    End of example

    Choices made under the CGT main residence rules

    In certain circumstances you can choose to treat a dwelling as your main residence for a period even though you no longer live in it or you are yet to live in it.

    There is no requirement for such choices by a transferor spouse where rollover applies, because the capital gain or loss. However there is nothing to prevent the transferor spouse making a choice, such as being part of the negotiations with the transferee spouse about the transfer of a dwelling.

    If there was a period when the transferor spouse and transferee spouse had different main residences before they separated, they need to choose to either:

    • treat one of the dwellings as the main residence of both of them for the period
    • nominate the different dwellings as their main residences and obtain a part exemption on both.

    See also:

    Choices relating to the main residence exemption generally need a decision by the day the person lodges their tax return for the income year they transfer or enter into the contract to sell the dwelling or their interest in it, or another CGT event happens to it. In most cases, preparing and completing their tax return is sufficient evidence of that choice.

    For the practical purpose of negotiating a property settlement, any choices the transferor spouse decides to make would generally be made before they transfer the dwelling or their interest in it to the transferee spouse.

    The transferor spouse could provide a signed statement to the transferee spouse at the time of the property settlement as evidence of making a choice. The transferee spouse could use a statement to support the calculation of any capital gain or loss they make after the disposal of the dwelling or another CGT event happens to the dwelling.

    Where appropriate we can allow further time for a decision after the normal required time frame.

    Once decided, it is binding and unchangeable.

    Example: Choice made by transferor spouse to treat dwelling as their main residence

    Denise buys a townhouse under a contract that settles on 1 August 1998. She lives in it for three years.

    On 14 August 2001, Denise and Calvin rent a flat and start living together as husband and wife. At that time, Denise begins renting out her townhouse. After living together for two years in the flat, Denise and Calvin buy a house. They move in on 25 September 2003, the date of settlement of the purchase contract. Denise continues to rent out her townhouse.

    In 2017, Denise and Calvin's relationship breaks down. They decide that Calvin will transfer his half share in the house to Denise and she will continue to live there. She will transfer her townhouse to Calvin to live in under a binding financial agreement.

    Because the townhouse had been Denise’s main residence, she can choose to continue to treat it as such for up to six years after moving out.

    In negotiating their binding financial agreement, Denise provides Calvin with a signed statement. This says that she chooses to treat the townhouse as her main residence for the two years between the time she moved out and the time they bought the house together.

    Because the ‘home first used to produce income’ rule applies, Calvin is taken to have acquired the townhouse for its market value on 14 August 2001. He will qualify for a partial main residence exemption when he sells it. The period from 1998 to 2001 is ignored from their combined period of ownership.

    The effect of Denise’s choice is that the townhouse is exempt from CGT for the period between when she moved out on 14 August 2001 and when she and Calvin bought the house together on 25 September 2003. So when Calvin sells it, he will get an exemption for that period as well as the period he lived in it after the marriage broke down.

    If Denise had not made the choice, Calvin would not get the exemption for the period from 14 August 2001 to 25 September 2003.

    End of example

    Foreign residents

    CGT rules for foreign residents recently changed. Before the changes, foreign residents could claim the CGT main residence exemption when disposing of residential property in Australia.

    New rules took effect on 9 May 2017. If you are a foreign resident for tax purposes at the time you dispose of your Australian property, you are no longer able to claim the CGT main residence exemption. That is unless you have been a foreign resident for six years or less and you experience certain life events. One of those life events is family law matters including marriage or relationship breakdown or similar maintenance agreements.

    There is a transition period that ends on 30 June 2020 for dwellings held before 9 May 2017.

    See also:

    Example: Foreign resident – main residence exemption for marriage breakdown

    On 16 September 2003, Joan and John buy a house in Australia and move into it together as husband and wife.

    Joan and John retire in 2018 and move to the Bahamas to live. They decide to rent out their Australian residential property.

    Joan and John's relationship breaks down in 2020. As a result, they have a court order under the Family Law Act 1975 to sell their Australian residential property.

    Joan and John have been foreign residents for less than six years at the time they sell their Australian property. They also meet the family law life event test as a result of their marriage breakdown. This means they are able to access the main residence exemption for the sale of their Australian property.

    End of example

    Dwellings transferred from a company or trust

    If a dwelling or an interest in a dwelling, transfers to you from a company or the trustee of a trust, and the marriage or relationship breakdown rollover applies to the transfer, you're treated as having owned the dwelling while owned by the company or trustee. However, you can't get the main residence exemption during any part of the period the company or trustee owned it even if you lived in the dwelling during that time.

    Therefore your entitlement to the exemption is only for the period after the transfer when it was your main residence if the dwelling transfers to you by a company or trustee as a result of your marriage or relationship breakdown. You work out the proportion of your capital gain or loss that is exempt by dividing the period after the transfer that it was your main residence by the combined period you and the company or trustee owned it.

    See also:

    Last modified: 20 Jan 2020QC 52262