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Ruling

Subject: Main residence exemption

Are you entitled to the six year capital gains tax (CGT) main residence exemption on the sale of your property?

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You purchased your main residence in 2000.

The land is less than two hectares.

You lived in your main residence until 2004.

You moved out of your main residence and have rented it out since.

You own investment properties but have not treated any other property as your main residence.

During your period of absence from your main residence you have resided at your place of employment, later moved overseas, returned to Australia and resided with your partner in a suburb close to their employment.

You are considering selling the property.

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 118-185.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Subsection 118-145(1).

Income Tax Assessment Act 1997 Section 118-150.

Reasons for decision

Capital gains tax (CGT)

Your net capital gain is included in your assessable income by section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Your net capital gain is calculated by subtracting any capital losses that you may have accrued from your capital gains made in that income year.

You make a capital gain or capital loss as a result of a CGT event (section 102-20 of the ITAA 1997). The most common event is CGT event A1. CGT event A1 happens when a person disposes of an asset to someone else. You are deemed to have disposed of an asset if a change in ownership occurs from you to another entity (section 104-10 of the ITAA 1997).

CGT main residence exemption

In certain circumstances, there may be an exemption that can apply, which means that the gain or loss created by a CGT event is disregarded. Exemptions from CGT are set out in Division 118 of the ITAA 1997. In particular, Subdivision 118-B of the ITAA 1997 contains the CGT main residence exemption. The exemption disregards a capital gain or capital loss a taxpayer makes from a CGT event that happens to a dwelling, or their ownership interest in a dwelling, which is their main residence.

A capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if:

· you are an individual

· the dwelling was your main residence throughout your ownership period (section 118-110 of the ITAA 1997)

· the property was not used to produce assessable income, and

· any land on which the dwelling is situated is not more than two hectares (section 118-120 of the ITAA 1997).

CGT main residence exemption absence rule

There are several extensions and limitations to the main residence exemption. These can affect your entitlement to the main residence exemption, depending upon your individual circumstances.

For example, there is an extension to the basic rule which allows you to continue the main residence exemption after the dwelling ceases to be your main residence. This is found in section 118-145 of the ITAA 1997 and is commonly known as the absence rule. Section 118-145 of the ITAA 1997 provides that if you leave your dwelling, such that it is no longer your main residence, you may choose to continue to treat it as your main residence, even if you have rented it out, provided certain criteria are met.

If you use the dwelling to produce income, the maximum length of time you can choose to have it treated as your main residence is six years after it becomes income producing. You are entitled to another maximum six years each time the dwelling becomes and ceases to be your main residence. The Commissioner does not have the discretion to extend the six year period.

If you choose to apply this exemption, no other property can be treated as your main residence during this period.

In your case, you are not entitled under subsection 118-145(1) of the ITAA 1997, to treat the residence as your main residence during the period you were renting it out because the rental period exceeds six years.