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Subject: Capital Gains Tax - Main residence
Question
Will you be entitled to the main residence exemption under Section 118-110 of Income Tax Assessment Act 1997 on the disposal of your dwelling?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
You purchased a dwelling as joint tenants with your spouse and occupied the dwelling as soon as practicable.
You separated from your spouse and moved out of the dwelling.
Your spouse subsequently vacated the dwelling.
The dwelling was tenanted and you have made an absence choice in relation to the dwelling.
Pursuant to consent orders you obtained your spouse's interest in the dwelling.
The dwelling was sold and you made a capital gain on the disposal.
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 118-110
Income Tax Assessment Act 1997 Section 118-125
Income Tax Assessment Act 1997 Section 126- 5
Reasons for decision
Capital Gains Tax
A capital gain or a capital loss may arise if a capital gains tax event (CGT event) occurs to a capital asset. The disposal of the dwelling, which is a CGT asset, causes a CGT event A1 to occur under the Income Tax Assessment Act 1997 104-10. (ITAA 1997) You dispose of an asset when a change of ownership occurs from you to another person or entity.
Marriage breakdown roll-over
Section 126-5 of the ITAA 1997 is relevant as it provides that there is a roll-over of a CGT asset if there is a CGT event as a result of a Court order under the Family Law Act 1975. It also provides that any capital gain or loss you make on the transfer of an asset to your spouse is disregarded and you are taken to have acquired your spouse's portion of the asset at the time it is transferred to you.
Main residence exemption
Section 118-110 of the ITAA 1997 provides that you disregard a capital gain or capital loss that you make from a CGT event that occurs to a dwelling that is your main residence. To be eligible for the full exemption, the dwelling must have been your main residence for the entire period that you owned it.
Absence choice
Subsection 118-145 of the ITAA 1997 allows a choice to be made to continue to treat a dwelling as a main residence even though it has ceased to be the case. The choice can be made for a total period of 6 years where the dwelling is used for the purpose of producing assessable income, or indefinitely where it is not used for this purpose. A separate period of 6 years is permitted each time the dwelling ceases and recommences to be your main residence.
It is important to note that the absence choice provisions are only available once the dwelling has met the criteria of your main residence, and if the choice has been made then no other residence is able to be treated as your main residence during the period.
Conclusion
In your case you acquired the dwelling as joint tenants with your former spouse and moved into the dwelling as soon as practicable. You moved out of the dwelling and separated from your former spouse after occupying the dwelling for a period of more than a year. You subsequently obtained exclusive ownership of the dwelling as a result of a Court order. You made an absence choice in relation to the dwelling while it was being used to produce assessable income for a period of less than 6 years and you have not treated any other dwelling during this time as your main residence.
As a result of this, the period covered by the absence choice as well as the period that you resided in the dwelling encompasses your entire ownership period and accordingly you are entitled to an exemption from any capital gains tax liability as a result of the disposal of your dwelling.