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Ruling

Subject: Capital gains tax - main residence exemption - absence rule

Questions and answers

Are you entitled to a full main residence exemption when you sell your ownership interest in the property?

No.

Are you entitled to a partial main residence exemption when you sell your ownership interest the property?

Yes.

Are you deemed to have acquired your ownership interest in the property on the date it was first rented out?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013.

The scheme commenced on:

1 July 2012.

Relevant facts and circumstances

You and your spouse purchased a house several years ago.

You lived in the property for a number of years.

You then moved overseas.

The property has been rented out since this time.

The property will be sold in the 2012-13 income year.

You returned to Australia a number of years ago.

You did not treat any other property as your main residence during the period you lived overseas.

When you returned to Australia, you purchased a new property.

You have lived in the new property since purchasing it and treat it as your main residence.

You continued to treat the first property as your main residence during your absence, until the time you purchased the new property. This period was for more than six years.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-185.

Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision

Generally, if you are an individual 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.

To get the full exemption from CGT:

The absence rule

Section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a taxpayer to make a choice that a dwelling that was the main residence of the taxpayer continues to be treated as the taxpayer's main residence even though it has ceased to be so. The choice can be made for a total of six years if part of the dwelling was used for the purpose of gaining or producing assessable income.

In your case, you treated the property as your main residence while you were absent from it until you purchased the new property which was for a period greater than six years. Therefore, you are not entitled to a full exemption under section 118-145 of the ITAA 1997. You will, however, be entitled to a partial exemption.

The first used to produce income rule

Section 118-192 of the ITAA 1997 states that if the main residence of a taxpayer, acquired post-19 September 1985, commences for the first time to be used for the purpose of producing assessable income, there is a deemed acquisition at market value of the dwelling (or an ownership interest in it) by the taxpayer where:

The first used to produce income rule applies to you because:

Therefore, for CGT purposes, you are deemed to have acquired the property on the date it was first rented out, at the market value at that time. Therefore, element 1 of the cost base will be this market value, rather than the actual purchase price you paid.

Calculating the partial exemption

Section 118-185 of the ITAA 1997 states that where an individual taxpayer who acquires a dwelling is entitled to a partial exemption for a relevant CGT event that happens in relation to the dwelling if the dwelling was their main residence for only part of their ownership period.

The capital gain or capital loss that is made is calculated as follows:

CG or CL amount × Non-main residence days

where:

CG or CL amount is the capital gain or capital loss the taxpayer would have made from the CGT event apart from the main residence exemption;

Non-main residence days is the number of days in the taxpayer's ownership period when the dwelling was not the taxpayer's main residence.

In your case:

The 'days in taxpayer's ownership period' will be from the date the property was first rented (i.e. the date you are deemed to have acquired it) until the date you sell the property.

The 'non-main residence days' will be from the end of the 6 year absence period until the date you sell the property.

Note

As both you and your spouse own the property, you must only include your share of the capital gain or capital loss in your income tax return.

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