Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011621462741

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Is the Taxpayer (TP) entitled to the full or partial main residence exemption upon disposal of their residential unit?

Yes. The TP is entitled to partial exemption.

This ruling applies for the following period

Year ended 30 June 2010

In this ruling

References to ITAA 1997 are references to the Income Tax Assessment Act 1997.

References to CGT are references to capital gains tax.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The following are the details relating to the residential property (unit) in question.

Residential Property-

Purchased AA.AA.XXXX

Period Rented Out AA.AA.XXXX to BB.BB.YYYY

Ownership Period not Principal Residence AA.AA.XXXX to BB.BB.YYYY

Period used as Principal Residence BB.BB.YYYY to CC.CC.YYYY

Ownership Period AA.AA.XXXX to DD.DD.ZZZZ

Sold DD.DD.ZZZZ

Purchase Price $$$$$

Sale price $$$$$

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-135

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Subsection 118-145

Income Tax Assessment Act 1997 Subsection 118-145(2)

Income Tax Assessment Act 1997 Subsection 118-145(3)

Income Tax Assessment Act 1997 Subsection 118-145(4)

Income Tax Assessment Act 1997 Subsection 118-185

Reasons for decision

Main residence exemption

Subdivision 118-B of the ITAA 1997 contains the CGT main residence exemption. The basic case is contained in section 118-110 of the ITAA 1997 and generally provides that an individual can disregard a capital gain that arises from disposing of his or her main residence.

Generally, to get the full exemption from CGT:

However, section 118-145 of the ITAA 1997 entitles you to choose to treat your unit as your main residence during your absence after you have first occupied it as your main residence and subsequently moved out.

Treating a dwelling as your main residence after you move out

As a general rule, a dwelling is no longer your main residence once you stop living in it. However, in some cases section 118-145 of the ITAA 1997 extends the main residence exemption. In these cases, you can choose to have a dwelling treated as your main residence for CGT purposes even though the dwelling has actually ceased to be the main residence. The application of the CGT main residence exemption in these circumstances is subject to a number of limitations (see below).

Note: A taxpayer who has never used the dwelling as a main residence cannot be said to have ceased to use it, as such, with the result that he or she cannot choose to "continue" to treat it as the main residence. You can only make this choice for a dwelling that you have first occupied as your main residence. 

Section 118-135 of the ITAA 1997 provides that If a dwelling becomes your main residence by the time it was first practicable for you to move into it after you acquired your ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence.

The TP did not move into their residential unit by the time it was first practicable to do so after they acquired the property. Accordingly, section 118-135 of the ITAA 1997 would not apply to treat the property as the TP's main place of residence from the time of acquisition to the time the TP moved into it.

The TP moved into the unit as their main place of residence and then moved out and rented it out again until the sale of the property. Hence, it is only from BB.BB.YYYY that the unit can be treated as their residence.

Where you use the dwelling to produce income, you can choose to continue treat it as your main residence while you use it for that purpose for up to six years after you cease living in it. You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be, your main residence (subsection 118-145(2) of the ITAA 1997). 

If you do not use the dwelling to produce income, you can choose to continue to treat the dwelling as your main residence for an unlimited period after you cease living in it (subsection 118-145(3) of the ITAA 1997).  

If you make this choice, you cannot treat any other dwelling as your main residence for that period (subsection 118-145(4) of the ITAA 1997).

Application to your circumstances

Section 118-135 and 118-145 do not apply to treat the TP's unit as their main residence from the time of purchase, as the TP had rented it out initially after acquisition and not moved into it and taken up residence by the time it was first practicable for them to move into it .

The TP can not elect to treat their unit as their main residence for the initial period of ownership as the TP did not move into the property choosing instead to rent it out. Therefore, during the initial period when the property was let, it does not qualify for the main residence exemption.

Under the provisions set out in section 118-145 of the ITAA 1997, the TP can elect to continue to treat their residential unit as their main residence for the period after they moved out of it until sale of the property. This is because the period the TP used it to produce rental income after they moved out was not more than six years. This accords with the TP's understanding as evident from their private ruling request.

As stated above, if this choice is made, under section 118-145 of the ITAA 1997 no other dwelling can be treated as the TP's main residence for this period.

Conclusion

Partial exemption

As stated above the unit is not considered the TP's main residence during their initial ownership period AA.AA.XXXX to BB.BB.YYYY. Therefore, the TP is not entitled to the full main residence exemption under s 118-110 of the ITAA 1997 because the property was not their main place of residence throughout your period of ownership of the unit.

The Commissioner will treat the TP's residential property as their main residence from BB.BB.YYYY (when the TP moved in) until DD.DD.ZZZZ (when the TP sold their property) pursuant to section 118-185 of the ITAA 1997 to allow partial exemption on the property.

The TP will be entitled to a partial main residence exemption for their unit for part of the ownership period. Accordingly, the capital gain made on the sale of the unit will have to be apportionment. The exempt period would be from BB.BB.YYYY to DD.DD.ZZZZ.

In working out the assessable capital gain on the unit the apportionment is as follows:

Under the discount method that is applicable in the TP's circumstances 50% of the apportionment amount calculated in the step above will be the amount subject to CGT.

The Guide to capital gains tax 2008-09 (NAT 4151) has examples illustrating the cost elements that are taken into account in arriving at the capital gain amount to be used in the above apportionment formula.

Note: Number of days property was not the TP's main residence is the number of days in the period AA.AA.XXXX to BB.BB.YYYY.

Number of days in ownership period is the number of days in the period AA.AA.XXXX to DD.DD.ZZZZ

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).