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Edited version of your written advice

Authorisation Number: 1051213844508

Date of advice: 12 April 2017

Ruling

Subject: Main residence exemption

Question

Does the main residence exemption from capital gains tax apply where a dwelling was your main residence for only part of the time you owned the property?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts

You purchased a property after 20 September 1985 (the dwelling)

You rented the property for a period of time.

The dwelling was your main residence for a period of time.

You undertook employment overseas for a number of years.

During the period when you were overseas the property was not used to produce income.

You continued to treat the dwelling as your main residence for this time.

The property was subsequently sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-20

Income Tax Assessment Act 1997 Section 100-35

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Capital gains tax (CGT)

CGT is the tax that a taxpayer pays on any capital gain included in their annual income tax return. It is not a separate tax, merely a component of their income tax. The taxpayer is taxed on their net capital gain at their marginal tax rate. Their net capital gain is calculated by subtracting any capital losses that they may have accrued from their capital gains made in that income year.  Any net capital gain is then included in their assessable income.

A taxpayer makes a capital gain or capital loss if a CGT event happens. For most CGT events, their capital gain is the difference between their capital proceeds and the cost base of their CGT asset.

CGT events are the different types of transactions or events that may result in a capital gain or capital loss. If the taxpayer disposes of land or a home (CGT event A1), the CGT event happens when they enter into the contract for. In certain circumstances, there may be an exemption or exception that can apply, which means that the gain or loss created by the CGT event is disregarded.

Main residence

Under the Income Tax Assessment Act, if you are an individual not a company or trust 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.

You can only claim the full main residence exemption where all of the following are satisfied:

You cannot claim the full main residence exemption because it was not your main residence for the whole of the ownership period and it was used to earn assessable income during part of the ownership period.

However, you can claim a partial main residence exemption as the property was your main residence during at least some of your ownership period.

Partial exemption

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are only eligible for a partial. The full exemption is proportionately reduced by reference to the period that the property was not your main residence.

You calculate the part of the capital gain that is taxable as follows:

Total capital gain made Number of days in your ownership period

From CGT event X when dwelling was NOT your main residence

Total number of days in your ownership period

Example calculation

Taxpayer X acquired a dwelling on 20 October 2005 which they let out to tenants until 21 October 2008, from which date they used the dwelling as their main residence. Taxpayer X eventually sold the dwelling on 8 September 2010 and made a capital gain of $40,000, calculated without regard to the exemption provisions. The capital gain is reduced pro rata by reference to the period Taxpayer X used the dwelling as their main residence. The reduced capital gain is:

$40,000 × 1,098 ( number of days from 20 October 2005 to 21 October 2008 )

1,785 ( number of days of Taxpayer X's ownership )

= $24,605

Conclusion

In your case, you are eligible for a partial main residence exemption. You can calculate the capital gain that will have to be included in your assessable income using the above formula.

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