Edited version of private advice

Authorisation Number: 1052412638745

Date of advice: 27 June 2025

Ruling

Subject: CGT - partial main residence exemption

Question

Are you eligible for a partial Capital gains tax (CGT) main residence exemption on the disposal of your ownership interest in property 1?

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 are an Australian resident for taxation purposes.

In the early 2000s, the purchase settlement occurred for a unit you purchased in Australia (Property 1), in joint names with your Australian resident spouse.

You and your spouse moved into Property 1 immediately after the property settlement date.

In mid-20XX, you and your spouse moved out of Property 1 and began renting it out.

You never moved back into Property 1 after this date.

You then immediately nominated Property 1 to be your main residence under the Capital gains tax (CGT) main residence exemption absence rule.

Your friend offered you alternative accommodation to live in, which you did not own yourself. You began living in this property from this point.

In late 20XX you signed a contract to purchase another Australian property in a different city (Property 2).

Up until this point in time, apart from Property 1, you did not own any other Australian property that you treated as your main residence.

In early 20XX, settlement took place for Property 2.

In late 20XX you moved to live in your siblings property.

However, you did not move into Property 2 due to the status of you and your spouse's employment, along with your children's schooling, and you continued to live in your siblings property until 20XX where you then moved into Property 2.

You will not treat Property 2 as your main residence until mid-20XX (6 years after you first used Property 1 to produce income), as you nominated Property 1 to be your main residence for the first 6 years it was rented out under the Capital gains tax (CGT) main residence exemption absence rule.

You then nominated Property 2 as your main residence from mid-20XX (6 years after you first used Property 1 to produce income).

At that point you decided to sell Property 1.

However, due to COVID-19, the sale of Property 1 was delayed.

In early 20XX, you obtained a sale contract to sell Property 1.

A few weeks later, settlement took place for Property 1.

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

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

Summary

Capital gains tax (CGT) event A1 happens for you in the 20XX income year when Property 1 was sold.

Property 1 was your main residence for part of your ownership period. As Property 1 was rented out for more than six years, you are entitled to a partial main residence exemption under section 118-185 of the Income Tax Assessment Act 1997 (ITAA 1997).

The special rule in section 118-192 of the ITAA 1997 applies to your case.

Therefore, Property 1 will have a cost base and reduced cost base equal to its market value at the time you first started using the property for income producing purposes.

In addition. as Property 1 was used to produce income during the period mid-20XX up until when it was sold (settlement date early 20XX), there will be a further adjustment required under section 118-190 of the ITAA 1997.

The CGT general discount applies as you sold Property 1 more than 12 months after you first used it to produce income.

Detailed reasoning

CGT event A1 happens when you dispose of a CGT asset you own. When Property 1 was disposed of in the 20XX income year, CGT event A1 happens for you and you need to determine any capital gain or loss from the event.

The main residence provisions contained in subdivision 118-B of the ITAA 1997 allow an individual to disregard a capital gain or capital loss relating to the disposal of a dwelling which was that person's main residence.

Property 1 was your main residence for a period of your ownership. Under section 118-145 of the ITAA 1997 (CGT main residence exemption - absence provision) you have chosen to continue to treat Property 1 as your main residence after you moved out in mid-20XX.

As Property 1 was being used for income producing purposes during your absence, the maximum period it can be treated as your main residence is six years (noting you cannot claim the main residence exemption for another property for the same period).

In your case, as Property 1 was rented out for more than six years before it was sold, you are eligible to a partial main residence exemption under section 118-185 of the ITAA 1997.

In addition, a special rule under section 118-192 of the ITAA 1997 applies where a main residence is first used for income-producing purposes after 20 August 1996 (commonly referred to as the 'home first used to produce income rule').

In respect of Property 1, the rule is triggered if the following apply:

•                     You acquired it on or after 20 September 1985;

•                     You first used it to produce income after 20 August 19YY;

•                     When you sell it (or another CGT event happens to it), you would get only a partial CGT exemption because you used it to produce income during the period you owned it; and

•                     You would have been entitled to a full exemption if the sale or other CGT event happened to it immediately before you first used it to produce income.

If these conditions are satisfied, you are taken to have acquired Property 1 with a cost base and a reduced cost base equal to its market value at the time you first started using it for income-producing purposes. Note that expenditure incurred before that time is ignored and cannot be added to the CGT cost base.

In your case, as discussed above, you are entitled to a partial main residence exemption, the income producing use started after 20 August 19YY, and you would have been entitled to the full main residence exemption if Property 1 was sold before you first rented it.

Therefore, the special rule in section 118-192 applies and you will work out the capital gain or loss using the market value of Property 1 at the time you first used it to produce income.

Further, section 118-190 of the ITAA 1997 provides that where you have used the property to produce assessable income your exemption will be reduced to the extent that you would have been able to deduct interest, if you had financed the property. That is to say, you must use a fair and reasonable approach to apportion between the use of your property for income producing purposes and your use of the property as your main residence.

Paragraph 4 of Taxation Determination TD 1999/66 Income tax: capital gains: what factors should be taken into account in determining the 'amount that is reasonable' in applying subsection 118-190(2) of the Income Tax Assessment Act 1997? provides the general rule for apportioning the main residence exemption is to adjust based on floor area and the period of income-producing use.

Subsection 118-190(3) of the ITAA 1997 provides you ignore any use of the dwelling for the purpose of producing assessable income during any period that you have made the absence choice to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

As you made the absence choice under section 118-145 of the ITAA 1997 you can ignore any use of Property 1 for the purpose of producing assessable income during your 6-year absence period (that is up until mid-20XX).

However, as the property was used to produce income during the period mid-20XX up until when it was sold (settlement date of early 20XX), there will be a further adjustment required under section 118-190 of the ITAA 1997.

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).