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Ruling
Subject: CGT main residence exemption
Question 1
Can you treat House B as your main residence from the date you acquired your ownership interest in it?
Answer
No
Question 2
Are you able to treat both House A and House B as your main residence during any period that you owned both properties in accordance with section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 3
Does section 118-145 of the ITAA 1997 apply to allow you to treat House B as your main residence while it was vacant and rented to a tenant?
Answer
No.
Question 4
Will you be entitled to a partial main residence exemption in relation to House B?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You purchased a house (House A). You lived in this house as your main residence.
Subsequently you purchased another house (House B) and you had intended to sell House A and move into House B as your main residence.
Your sibling was interested in buying House A. Due to their financial situation; it took an extended period of time for them to obtain finance to purchase the home from you. The property transferred to your sibling more than 12 months after you purchased House B.
You did not receive any consideration from your sibling in relation to the transfer of House A. You simply transferred the remaining loan balance relating to the mortgage of House A into your sibling's name.
Following advice from your solicitor, the market value of the property at the time of transfer, was cited as the consideration you received on the transfer documents.
You did not include any capital gain on your tax return in relation to the disposal of House A.
Up until this point you had remained living in House A. House B had been vacant from the purchase date for a period of time, after which you began to rent out House B to a tenant. House B was rented out, and you received rental income for a period of time.
Following the transfer of House A to your sibling, you and your spouse moved into a property that had been rented by your spouse. You or your spouse had no ownership interest in the rental house.
After a period of time, you and your spouse moved into House B. You completed renovations to House B.
After a period of time, you and your spouse moved back to House A (which is now owned by your sibling) as you intended to sell House B. Your sibling had left House A vacant as they returned to Country X for family reasons. You sold House B.
You are currently looking for a new house to purchase.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-135
Income Tax Assessment Act 1997 Section 118-140
Income Tax Assessment Act 1997 Section 118-145
Reasons for decision
Summary
House B cannot be considered to be your main residence from the time you acquired it as you did not move into House B as soon as practicable after you acquired it. Accordingly section 118-140 and 118-145 of the ITAA 1997 will not apply to grant you a full main residence exemption. You are however, entitled to a partial main residence exemption in relation to House B.
Detailed reasoning
Section 118-110 of the ITAA 1997 states that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period.
If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption.
When a dwelling is your main residence
The following factors may be relevant in working out whether a dwelling is your main residence:
· the length of time you live there (there is no minimum time a person has to live in a home before it is considered to be their main residence)
· whether your family lives there
· whether you have moved your personal belongings into the home
· the address to which your mail is delivered
· your address on the electoral roll
· the connection of services (for example, phone, gas or electricity)
· your intention in occupying the dwelling.
A mere intention to construct or occupy a dwelling as your main residence, without actually doing so, is not sufficient to get the exemption.
A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time (section 118-135 of the ITAA 1997).
In your case you purchased House B; however you did not move into House B as soon as practicable. You contend that there were delays due to your sibling being unable to obtain finance to purchase House A. However, following the transfer of House A to your sibling, you still did not move into House B for more than 12 months. Additionally, you received rental income from the property before you moved into it.
Accordingly, House B will not be considered your main residence from the time you acquired your ownership interest in it; it will only be considered your main residence from the period you began to reside there with your spouse.
Moving from one main residence to another
Section 118-140 of the ITAA 1997 provides that if you acquire a new main residence before you dispose of your old one, both dwellings are treated as your main residence for up to six months if:
· the old dwelling was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
· you did not use the old dwelling to produce assessable income in any part of that 12 months when it was not your main residence, and
· the new dwelling becomes your main residence.
The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 explains that this provision was intended to allow for where a person moves into a new dwelling before disposing of their old dwelling. The six month period allows time for the sale of the old dwelling to take place. There is no provision in the legislation that allows for an extension to the six month period.
House B was not your main residence during the time you owned both House A and House B. Accordingly, section 118-140 of the ITAA 1997 does not apply and you are not entitled to a full main residence exemption for both House A and House B.
Continuing main residence status after a dwelling ceases to be your main residence
Section 118-145 of the ITAA 1997 allows you to choose to treat a dwelling as your main residence even though you no longer live in it.
If you do not use it to produce income (for example, you leave it vacant or use it as a holiday home) you can treat the dwelling as your main residence for an unlimited period after you stop living in it. If you do use it to produce income (for example, you rent it out or it is available for rent) you can choose to treat it as your main residence for up to six years after you stop living in it.
You cannot make this choice for a period before a dwelling first becomes your main residence.
In your case, House B did not become your main residence until you and your spouse moved into it. You cannot choose to treat House B as your main residence for a period before this time. Accordingly, section 118-145 of the ITAA does not apply to allow you to treat House B as your main residence while it was vacant and being rented out.
Partial exemption
If a CGT event happens to a dwelling you acquired on or after 20 September 1985, and that dwelling was your main residence but not for the whole time you owned it, you are entitled to a partial exemption.
House B was your main residence from when you and your spouse moved into it until you sold it. Accordingly, you are entitled to a partial main residence exemption.
Note:
The part of the capital gain that is taxable is calculated as follows:
Total capital gain made from the CGT event |
x |
number of days in your ownership period |
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