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Edited version of private ruling
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Ruling
Subject: Capital gains tax
Question and answer:
Are you entitled to the full main residence exemption on Property A?
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts:
Property A was your main residence from purchase, after 19XX.
Your former spouse also lived in the property until a relationship break down and your former spouse transferred their half share to you under court orders.
You remained in Property A for a further period until you moved in with your current spouse at their existing home
You have been renting the Property A out since you moved in with your current spouse.
You intend to sell the Property A and will choose it to be your main residence until you moved in with your current spouse.
Reasons for decision
Main residence exemption
The main residence exemption under subdivision 118-B of the ITAA 1997 may allow a taxpayer to disregard all or part of any capital gain or capital loss they made from a CGT event that happens to their ownership interest in a dwelling where the dwelling was their main residence.
The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayers main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person.
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.
In your case you had an ownership interest in Property A from the purchase of the property in xxxx.
The property A was your main residence until you moved in with your current spouse.
The Absence Rule
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 you have been renting out property A from when you moved in with our current spouse. During the period it was rented you were and still are treating the second property as your main residence.
You are therefore entitled to a partial main residence exemption on Property A
The choice to treat a dwelling as your main residence can only be made after the disposal occurs and is evidenced by any capital gain or loss declared or not declared in the income tax return for the relevant year