Edited version of private advice

Authorisation Number: 1052427217658

Date of advice: 29 July 2025

Ruling

Subject: Partial exemption - capital gains tax

Question

Will you be entitled to partially disregard the capital gain made on the disposal of your property in accordance with section 118-185 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You both owned a property (property A) which you both resided in.

On DDMM20YY, you acquired another property (property B) as tenants in common. One having a 60% ownership interest and the other having a 40% ownership interest.

The property has a land size of 809 square metres.

You initially purchased property B as an investment property to be leased out.

From DDMM20YY until DDMM20YY, you leased property B out.

On DDMM20YY, you entered a building contract to demolish the existing house on property B and build a new four-bedroom house for you both to reside in.

On DDMM20YY the construction commenced on the new property.

On DDMM20YY, you sold property A.

On DDMM20YY you received the certificate of occupancy for the newly constructed house on property B.

On DDMM20YY you moved into property B as your main residence.

On DDMM20YY, settlement occurred on property A.

You both used the absence choice when you vacated property A from DDMM20YY until DDMM20YY when settlement occurred.

You both claimed the main residence exemption for your share of your ownership interest in property A in your tax return year ending 20XX.

On DDMM20YY, you sold property B at auction. Settlement date occurred on DDMM20YY.

You only used property B as your main residence from the date that you moved in on DDMM20YY until moving out on the settlement date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section118-110

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

CGT event A1 will happen when you sell your ownership interest in a property (section 104-10 of the ITAA 1997). Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (section 118-110 of the ITAA 1997). To obtain the full exemption:

   •  The dwelling must have been your home for the whole period you owned it;

   •  You must not have used the dwelling to produce assessable income; and

   •  Any land on which the dwelling is situated must be 2 hectares or less. Also, if you owned more than one dwelling during a particular period, only one of them can be your main residence at any one time. If the conditions above are not fully met, you may be entitled to a partial main residence exemption (section 118-185 of the ITAA 1997).

Changing main residences

Under section 118-140 of the ITAA 1997, if you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

   (a)  6 months ending when your ownership interest in your existing main residence ends; or

   (b)  the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends.

(2) Subsection (1) only applies if:

   (a)  your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and

   (b)  your existing main residence was not used for the purpose of producing assessable income in any part of that 12-month period when it was not your main residence.

Application to your circumstances

Under section 118-110 of the ITAA 1997 a capital gain or capital loss is disregarded when a CGT event occurs to a dwelling which was your main residence throughout your ownership period. As you leased out property B before making it your main residence, you are not entitled to a full main residence exemption.

Under section 118-185 of the ITAA 1997 you only get a partial CGT exemption on a dwelling that was your main residence for part only of your ownership period. As property B became your main residence, you are entitled to a partial main residence exemption for your share of your ownership interest in the property.

Under section 118-145 of the ITAA 1997 if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. You made this choice when you moved from property A into property B.

You claimed a full main residence exemption for your share of your ownership interest in property A in the 20XX income year when you disposed of it. You moved into property B on DDMM20YY with a settlement date on property A on DDMM20YY.

The partial main residence exemption on property B commences 6 months before the settlement date on property A which will be from DDMM20YY. As per section 118-140 of the ITAA 1997 you can treat both properties as your main residence for this period. The days before your main residence days will be your non main residence days and will be subject to CGT.