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Ruling

Subject: Capital gains tax - Main residence exemption

Questions and answers:

Are you entitled to disregard any capital gain you made when you disposed of your property?

No.

Are you entitled to a capital gains tax partial main residence exemption?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You purchased a residential dwelling in 200X.

You purchased the property with the intention of occupying it as your main residence.

You decided to initially rent the property to tenants and live with your parents.

You eventually moved into the property in 200Y.

After a number of months you moved back to live with your parents and rented the property to tenants again.

You exchanged contracts for the sale of the property in the relevant year.

You are choosing to treat the property as your main residence.

The land on which the dwelling is built is less than two hectares in size.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-190

Reasons for decision

Capital gains tax - Full main residence exemption

The most common type of capital gains tax (CGT) event is CGT event A1 which happens when you dispose of a CGT asset to someone else. The disposal of a property is a CGT A1 event and the time of the event is when the disposal contract is entered into.

In your situation, you exchanged contracts for the sale of your property in the relevant year. Therefore, you had a CGT event in the relevant income tax year.

If you are an individual you can disregard a capital gain or capital loss you make from a CGT event that happens to a dwelling that qualifies as your 'main residence' as long as:

You can establish that a dwelling is your main residence when you move in to it as soon as practicable after your ownership commences. Once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence despite an absence from the dwelling. This only applies where no other dwelling is treated as your main residence during the period of absence.

Where the dwelling is used to produce assessable income, the period of time you may treat it as your main residence is limited to a maximum of six years. The six year period commences when the dwelling is first used to produce assessable income and ends when the dwelling ceases to be used to derive income.

In your situation, you purchased the property with the intention of it becoming your main residence. However, for personal reasons you did not move into the property as soon as it was practicable to do so. Instead, the property was initially rented to tenants. The intention to occupy a property as a principal place of residence without actually doing so is insufficient grounds to qualify for the full main residence exemption.

You are not entitled to treat the property as your main residence for the entire period of ownership and are therefore not entitled to disregard the full amount of any capital gain you made when you disposed of your property.

Partial main residence exemption

You may be eligible for a partial main residence exemption if the dwelling was your main residence for only a part of the period you owned it. This may occur when you use the dwelling to produce assessable rental income for part of the period you owned it. If you are eligible for partial exemption, part of the capital gain you make is ignored for tax purposes.

To calculate the partial exemption you need to work out the amount of the full capital gain, the number of days it was not your main residence and the total number of days you owned it. You then multiply the capital gain by the number of non main residence days and then divide by the total number of ownership days. This is the amount of your capital gain.

In your situation, you rented the property to tenants and also lived in the property as your main residence during your ownership period. Therefore, you are entitled to a partial main residence exemption and can disregard part of the capital gain you made in the relevant income tax year.

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