Edited version of private ruling

Authorisation Number: 1011712596216

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Ruling

Subject: Capital gains tax

Question and answer:

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

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You purchased a home a number of years ago property A.

You moved into this house on the same day as it was settled and used it as your main residence.

You were transferred interstate for work.

You rented property A out.

You then purchased a home to live in while you were interstate, property B.

You have sold property B.

You have also sold property A.

You have elected for property A to be your main residence for the whole of your ownership period.

You are aware that you can only have one main residence at any one time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 118-110

Reasons for decision

Capital Gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes 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.

A taxpayer makes a capital gain if their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.  

A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.

Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's 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.

However, subject to the absence rule, a taxpayer will only get a partial exemption for a CGT event that happens in relation to their ownership interest in a property if the dwelling was their main residence for only part of their ownership period.

The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence.

The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence.

This choice needs to be made only for the income year that the CGT event happens to the dwelling for example, the year that a taxpayer enters into a contract to sell it.

If a taxpayer owns both a dwelling that they can choose to treat as their main residence after they no longer live in it, and a dwelling they actually lived in during that period of time then they make the choice for the income year they enter into the contract to sell the first of those two dwellings.

If a taxpayer makes this choice, they cannot treat any other dwelling as their main residence for that period.

Dwelling used to produce income

If a taxpayer does not use their dwelling to produce income, for example, it is left vacant or used as a holiday home then they can treat the dwelling as their main residence for an unlimited period after they stop living in it.

If a taxpayer does use their dwelling to produce income, for example, they rent it out or it is available for rent, they can choose to treat it as their main residence for up to six years after they stop living in it.

In your case, property A was used as your main residence until you moved interstate at which point you rented it out.

You elected for property A to be your main residence.

Accordingly you are entitled to the full main residence exemption as you did not rent the house out for longer than 6 years in accordance with the absence rule and you elect for property A to be your main residence.

Consequently you are not subject to capital gains tax on the sale of property A.