Edited version of private advice

Authorisation Number: 1052110274641

Date of advice: 21 April 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Are you entitled to a full main residence exemption on the relevant property?

Answer

No.

Question 2

Are you entitled to a partial main residence exemption on the relevant property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased Property Z and treated it as your main residence.

Your spouse purchased Property Y and treated it as their main residence.

You and your spouse contract to purchase Property X to become your joint main residence.

Property Z becomes an investment property several months after the purchase of Property X, and you declare the rental income in your tax return.

Property Y, which your spouse owns, remains occupied by your spouse's children rent free.

There were existing tenants in Property X.

You and your spouse allowed the tenants to remain in Property X until they were able to secure another property.

The existing tenants of Property X had 2 large 'unruly' dogs and could not find a replacement rental, so the tenants remained in Property X for several months after you had purchased it.

Rental income from Property X was declared in your and your spouse's personal tax returns.

You and your spouse move into Property X several months after the purchase and commenced treating it as your main residence.

Several years later you and your spouse sell Property X.

You and your spouse move to Property Y and commence treating it as your main residence.

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 118-185

Reasons for decision

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 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 taxpayers' 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 taxpayers' 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 the 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 did not move into the Property X as soon as practical after you and your spouse purchased it.

You and your spouse allowed the existing tenants to remain in the property for several months at which point you moved in.

For the relevant period the property was not lived in by you and your spouse as your main residence.

You are not entitled to a full main residence exemption on Property X.

Partial main residence exemption from CGT

Section 118-185 of the ITAA 1997 provides that you are entitled to a partial exemption from CGT where a dwelling was your main residence for part of your ownership period. Subsection 118-185(2) of the ITAA 1997 provides a formula which allows you to adjust the capital gain or capital loss amount calculated on disposal of the property to take into account the proportion of your main residence days in the property to the total number of ownership period days of the property.

You are entitled to a partial main residence exemption on Property X from when you moved into the property until it was sold.

The period from the date you purchase the property until you moved in, is subject to CGT.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).