Edited version of private advice

Authorisation Number: 1052099505189

Date of advice: 2 May 2023

Ruling

Subject: CGT - main residence

Question

Are you entitled to the main residence exemption on Property A?

Answer

Yes.

Question

Are you entitled to a partial main residence exemption on Property B when you sell it?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20YY

The scheme commenced on:

XX Month 20YY

Relevant facts and circumstances

You purchased Property A on XX Month 20YY for $XXX,XXX.

You lived in Property A as your main residence.

You purchased Property B on XX Month 20YY.

As per the previous owner's requirement, you leased Property B to them for one month after settlement.

You then started renovating Property B and moved in as soon as practical which was on XX Month 20YY.

You are a FIFO worker and Property B has been your main residence since XX Month 20YY.

Property A was either vacant or tenanted by a friend during the period from XX Month 20YY until Month 20YY. You did not charge any rent and Property A did not produce any income.

You sold Property A on XX Month 20YY.

You are considering selling Property B within the next 6 months.

Reasons for Decision

Capital Gains Tax

You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss.

You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it.

You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it.

Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate.

CGT - main residence

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

Whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to:

• the length of time the taxpayer has lived in the dwelling
• the place of residence of the taxpayer's family
• whether the taxpayer has moved his or her personal belongings into the dwelling
• the address to which the taxpayer has his or her mail delivered
• the taxpayers address on the Electoral Roll
• the connection of services such as telephone, gas and electricity
• the taxpayer's intention in occupying the dwelling.

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

Moving into the dwelling

To establish a dwelling as a main residence you must move in as soon as practicable. The term as soon as practicable is used in section 118-135 of ITAA 1997 to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the property became your main residence on the date you acquired it (that is, you would have to physically move in on that day).

In your case you moved into Property A when your purchase of the property settled. You then used Property A as your main residence from the date settlement, XX Month 20YY.

Changing Main Residences

Subsection 118-140(1) of the ITAA 1997 states that if you acquire an ownership interest in another property and intend to use it as your main residence, you are able to treat your original property and your newly acquired property as your main residences for a maximum period of 6 months.

Subsection 118-140(2) of the ITAA 1997 states that the exemption outlined in subsection 118-140(1) of the ITAA 1997 only applies if:

(a)  Your original main residence was your main residence for a minimum of 3 months in the 12 months prior to the disposal of it, and

(b)  You did not use it to produce assessable income in any part of those 12 months when it was not your main residence.

Application to your circumstances

You purchased a second residence, Property B. As per the previous owner's requirement, you leased the property back to them for a period of a month. After this you commenced renovations on the property and moved in on XX Month 20YY. You will be subject to CGT for the period that Property B was leased back to the previous owners. That is, you will get a partial main residence exemption for Property B from the date you lived in the property as your main residence.

After you moved into Property B, Property A was either vacant or tenanted by a friend. You did not charge your friend any rent. You then sold Property A on XX Month 20YY. You will be able to use the 6-month changing main residence rule for Property A as you meet the requirement in paragraph 118-140(2)(b) of the ITAA 1997 set out above.

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