Edited version of private advice

Authorisation Number: 1052137739676

Date of advice: 10 July 2023

Ruling

Subject: CGT - main residence

Question 1

Can you claim the full main residence exemption provided in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) and disregard any capital gain made on the sale of Property 1?

Answer

No.

Question 2

Can you claim a partial main residence exemption for Property 1 as provided in section 118-185 of the ITAA 1997 from the date you moved into the Property 1 until the date you moved into Property 2?

Answer

Yes.

Question 3

Can you claim the full main residence exemption provided in section 118-110 of the ITAA 1997 and disregard any capital gain made on the sale of Property 2?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You bought a residential property (Property 1)

The land size of Property 1 is less than two hectares.

You were the sole owner of this property.

As a condition of sale, the previous owners of Property 1 retained the right to reside in the property as tenants from the date of settlement for a period of time less than twelve months in duration at the market rate of rent.

The previous owners did not reside in Property 1 as tenants for the full period stipulated in the agreement, and vacated the property less than six months after you took ownership of the property.

You moved into the Property 1 after it was vacated by the previous owners.

You lived in Property 1 as your main residence for approximately six months.

After living in Property 1 you rented the property out to tenants.

You have never lived in Property 1 after deciding to rent the property out.

You sold Property 1 approximately 15 years after acquiring it.

Approximately 5 years after purchasing Property 1, you and your spouse bought a residential property (Property 2) obtaining a 50% ownership interest each.

After purchasing the property, you resided at Property 2 for four or five nights per week, and stayed with your family in their home for two or three nights per week until approximately 11 months after the date you acquired an ownership interest in Property 2.

You paid mortgage repayments, utilities and food expenses at Property 2 from a joint bank account which you held with your spouse since the date you acquired an ownership interest in the property.

You did not provide any financial contributions to stay at your family's home since you acquired an ownership interest in Property 2.

You had your own room at Property 2 and kept personal belongings at the property since the date you acquired an ownership interest in the property.

You lived in Property 2 100% of the time as your main residence from approximately 11 months after you acquired an ownership interest in the property until you sold the property approximately four years later.

You continued to reside in Property 2 after selling it.

You repurchased Property 2 some years later.

You have continued to reside in Property 2 since repurchasing it.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 115-25

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

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-190

Reasons for decision

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

CGT event A1 will happen when you sell your ownership interest in a property (section 104-10 of the ITAA 1997).

Generally, 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 (section 118-110 of the ITAA 1997). To obtain the full exemption:

•         The dwelling must have been your home for the whole period you owned it;

•         You must not have used the dwelling to produce assessable income; and

•         Any land on which the dwelling is situated must be 2 hectares or less.

Also, if you owned more than one dwelling during a particular period, only one of them can be your main residence at any one time.

Section 118-135 of the ITAA 1997 provides that if the dwelling is moved into as soon as is practicable after the ownership interest was acquired, the dwelling is treated as the individual's main residence since the time that the ownership interest was acquired. However, the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 (the Explanatory Memorandum) explains that section 118-135 of the ITAA 1997 is not extended to the situation where an individual who acquires an ownership interest in a property is unable to move into the dwelling because it is being rented out.

Section 118-145 of the ITAA 1997 provides that once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence during periods of absence. When the dwelling is left vacant, you may continue to treat the dwelling as your main residence for an indefinite period. When you choose to do this, you are making an absence choice.

Where the dwelling is rented, the maximum period that you may continue to treat the dwelling as your main residence is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence. The Commissioner does not have any discretion to extend the six year period.

Section 118-140 of the ITAA 1997 provides that when an individual acquires an ownership interest in a dwelling that is to become their main residence and they retain their ownership interest in your existing main residence, they cannot treat both dwellings as their main residence for any period of time if they did not reside in their existing main residence for at least 3 months continuously in the 12 months prior to the acquisition of the new main residence, or if the existing residence was used to gain or incur assessable income at any time in the 12 months prior to acquiring the new main residence.

Where you are not entitled to a full exemption, you may still be able to obtain a partial main residence exemption.

Section 118-185 of the ITAA 1997 also provides that only a partial main residence exemption is available where a dwelling is the main residence of an individual for only part of their period of ownership, subject to the application of absence provisions contained in sections 118-145 and 118-150 of the ITAA 1997.

Application to your situation

Question 1

You allowed Property 1 to be rented for a period of time prior to moving into the property which is not a situation sufficient to apply the provision of section 118-135 of the ITAA 1997, as confirmed by the Explanatory Memorandum. Therefore, it is held that you did not move into the property as soon it was practicable to do so.

Furthermore, you rented the property out to tenants for most of the period of ownership, and you acquired a new main residence at Property 2 while you retained ownership of Property 1.

This means that the dwelling will be your main residence from the time it actually became your main residence (rather than from the time of acquisition) until you moved into Property 2, and only the partial (not the full) exemption will be available under section 118-185 of ITAA 1997.

Therefore, you cannot apply the full main residence exemption to the sale of Property 1.

Question 2

As you used the Property 1 to gain rental income, subsection 118-145(2) of the ITAA 1997 stipulates that the maximum period of absence during which you can elect to treat the property as your main residence in is six years. However, because you took a new main residence at Property 2 prior to the conclusion of this six year period, subsection 118-140(2) of the ITAA 1997 restricts the period during which you can claim the main residence exemption for the Property 1 in your absence to the date you moved into Property 2.

Therefore, you can claim the partial main residence exemption for Property 1 from the date you moved into the property until the date you moved into Property 2.

You calculate your capital gain or loss using the following formula:

Capital gain × (non-main residence days ÷ Total number of days in your ownership period)

Your non-main residence days are the number of days in your ownership period when the dwelling was not your main residence.

Please note that as you had owned Property 1 for a period greater than twelve months when you disposed of your ownership interest, you will be able to reduce the capital gain you make by 50% (as per section 115-25 of the ITAA 1997).

Question 3

The circumstances under which you resided in Property 2 confirm that it was your primary place of residence since the date at which you acquired an ownership interest in the property. As this property was your main residence for the entire duration over which you held an ownership interest, the full main residence may be applied and any capital gains you incurred from the sale of the property will be disregarded in accordance with section 118-110 of the ITAA 1997.

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