Edited version of your written advice

Authorisation Number: 1012926104307

Date of advice: 15 December 2015

Ruling

Subject: Capital gains tax - main residence exemption

Question 1:

Will you be able to fully disregard any capital gain made on the disposal of the dwelling under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2:

Will you be able to partially disregard any capital gain made on the disposal of the dwelling under section 118-185 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following period:

Income year ending 30 June 20EE.

The scheme commences on:

1 July 20EE.

Relevant facts and circumstances

You purchased a double block of land (Property A) with settlement occurring after 20 September 1985. A garage and shedding were spread over both blocks.

You commenced building a dwelling on Property A straight away and moved into the completed dwelling located on Block A a number of months later.

The garage and the sheds on Property A were demolished a number of years later, with the building of a dwelling (the dwelling) being commenced on the other part of Property A (being Block B) a number of years after the property had been purchased.

The building of the dwelling on Block B (the Block B dwelling) was completed and you commenced using the dwelling as a rental property around eight years after the property had been purchased.

You owned another property (Property B) which was your main residence from 20WW.

In the later part of 20WW, you travelled overseas for an intended period of around 12 months. Property B was left fully furnished with all of your possessions being left in the property.

After meeting your then partner, now spouse, your trip became an extended time out of Australia.

You travelled back to Australia in the middle of 20XX for less than seven weeks, in late 20XX for less than three weeks and again in late 20XX, staying at Property B on each occasion.

In 20YY, you decided to return to Australia, and Property B was sold in the later part of 20YY. Property B was your main residence when it was disposed of due to the period you had resided in it and the choices you had made in relation to the property.

The Block B dwelling was renovated redecorated and was furnished with the furnishings from Property B. You had intended moving into the Block B dwelling, however, at the last minute your spouse's work conditions changed. Your spouse had planned to retire, but the penalties on their overseas pension fund were so high that they could not proceed with their plan. As a result, the Block B dwelling had been tenanted fully furnished.

During the period from late 20YY to around mid-20AA, you travelled to Australia from overseas as follows:

During the period from late 20YY to mid-20AA, you resided at a property located overseas with your partner (Overseas dwelling 1), and returned to this residence when you returned from your visits to Australia.

During the period from around mid- 20AA to late 20DD, you travelled to Australia from overseas as follows:

For the period from mid- 20AA to late 20DD, you resided at an overseas property in another country (Overseas property 2) and returned to that residence after your visits to Australia.

You returned to Australia to permanently reside and resume work around late 20DD and commenced residing in the dwelling.

In early 20EE, your spouse commenced residing in the dwelling after they had gained their Australian residency.

You and your spouse entered into a contract to purchase a vacant block of land (Property C) around mid-20EE.

You and your spouse entered into a contract to build a dwelling on Property C.

A contract of sale for the Block B dwelling was entered into in early 20EE.

The building of the Property C dwelling was completed around mid-20EE and you and your spouse moved into the Property C dwelling.

Settlement on the disposal of the Block B dwelling occurred on 10 July 20EE.

The Block B dwelling had been rented out for the following periods during your ownership period:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Summary

A dwelling can only be your main residence if you move into it. You will only be entitled to a partial main residence exemption if you have only lived in your dwelling for part of your ownership period.

Detailed reasoning

Capital gains tax

A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own.

The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.

A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

Full Main Residence Exemption

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence.

However, in order to obtain a full exemption from CGT, the dwelling must have been:

• your main residence for the entire period you owned it

• must not have been used to produce assessable income ; and

• any land on which the dwelling is situated should not be more than two hectares.

Furthermore, for this exemption to apply it must be established that a property is your main residence or home. Whether a dwelling is an individual's principle residence depends on the facts of each case. The factors to be taken into account include the length of time the individual lives in the dwelling, the connection of services, mailing address, and whether the individual has moved his/her personal belongings into the dwelling.

For the purpose of the main residence exemption, you have an ownership interest in a dwelling from the date of settlement of the contract of purchase (or if you have a right to occupy it at an earlier time, that time) until the date of settlement of the contract of sale. This period is called your ownership period. 

If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time except in limited circumstances when moving from one main residence to another.

Application to your situation

In your case, you purchased a double block of land after 20 September 1985, on which two buildings were built, being a dwelling located on Block A and a dwelling located at Block B (the Block B dwelling).

The Block B dwelling was rented out continuously from early 20VV until mid-20DD.

You moved into the Block B dwelling in late 20DD, after you had returned to Australia after living overseas for a number of years, and continued to reside in it until it was disposed of, with settlement occurring in mid- 20EE.

During the period that you lived overseas, from late 20WW to late 20DD, you returned to Australia on numerous occasions for short periods of time. During some of those trips you stayed in the Block B dwelling either by yourself on average for less than a month, or with your child when they were renting the dwelling. On other occasions you stayed with family members.

Based on the information you have provided it is viewed the dwellings that you lived in with your partner (spouse) overseas in the overseas properties were your common law residences. You had left the overseas dwellings you resided in with your partner to travel to Australia and had returned to the same dwellings after you had departed from Australia. Therefore, you had not abandoned your overseas dwellings when you travelled to Australia and they continued to be your common law residences until the time you moved out of them.

While you owned the Block B dwelling and had stayed in the dwelling during some of your visits to Australia, it had not become your common law main residence until you had moved into the dwelling in late 20DD. Ownership of a property is not the test for the main residence exemption, but the time spent residing in the dwelling and any CGT choices that are made in relation to the dwelling are.

Therefore, based on the facts of your situation it cannot be viewed that the Block B dwelling had started being your main residence for CGT purposes until you moved into the dwelling in late 20DD.

As the Block B dwelling has not been your main residence for all of your ownership period, being from mid-1996 until settlement occurred in mid-20EE, you will not be entitled to a full main residence exemption on the disposal of the dwelling.

We have considered your eligibility to a partial main residence exemption as follows:

Partial main residence exemption

Section 118-185 of the ITAA 1997 states that if a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that occurs in relation to the dwelling. The capital gain or loss is calculated using the following formula:

Where:

Capital gain or capital loss amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

Non-main residence days is the number of days in your ownership period when the Block B dwelling was not your main residence.

Total days in your ownership period is the total days from the date of settlement on the purchase of the land on which the Block B dwelling was built until the settlement on the disposal of the Block B dwelling occurred.

Application to your situation

Based on the information provided, we view that you had moved into the Block B dwelling in late 20DD, and had continued to reside there until the Block B dwelling was disposed of in 20EE. Therefore, you are entitled to a partial main residence exemption on the disposal of the Block B dwelling in relation to the time it had been your main residence.

However, you had purchased the vacant block of land (Property C) in 20EE and moved into the dwelling built on the land in mid-20EE. As outlined above, you cannot have more than one main residence at any time, with the exception of limited circumstances such as when you move from one main residence to another.

You have not advised us of any choices you have made in relation to Property C in relation to the main residence exemption, such as the choice to treat the Property C land as your main residence prior to the Property C dwelling becoming your main residence. Therefore, we cannot comment on how the main residence exemption provisions relate to the Property C dwelling and how those choices would impact on the eligibility of main residence exemption in relation to the Block B dwelling.

Regardless of this, an exemption will apply for the last six months before the disposal of the Block B dwelling had occurred under the changing main residences CGT provisions. That is, both the Property C dwelling and the Block B dwelling will both be treated as your main residence for the six month period from six months before you disposed of the Block B dwelling.

Based on the information provided, without taking into account any choices you may make in relation to Property C, the partial main residence exemption will be calculated in relation to the Block B dwelling using the following:

Your non-main residence days will be the total of days from the date that settlement occurred on the purchase of the Property A had occurred until the Block B dwelling became your main residence. That is, from mid-1996 until late 20DD.

The total days in your ownership period will be the total of the days from the date that settlement on the purchase of Property A occurred until settlement on the disposal of the Block B dwelling occurred. That is, from mid-1996 until mid- 20EE.

Note: When calculating the capital gain made on the disposal of the Block B dwelling, the cost base of the Property A will need to be apportioned between Block A and Block B on a reasonable basis.

Any expenses claimed as rental deductions in relation to the Block B dwelling cannot be included in the cost base of the Block B dwelling.

If the conditions for the 50% CGT discount have been met, any capital gain made on the disposal of the Block B dwelling can be reduced by 50%.

Note: If you make the choice to treat the Property C land as your main residence from the date settlement on the purchase of the land occurred, the Block B dwelling cannot be viewed as your main residence for the period from the date that settlement on the purchase of the Property C land occurred until the start of the six month period relating to changing main residences commences. Therefore, the period from the date settlement on the purchase of Property C occurred until the start of the six month period for changing main residences commences will also be non-main residence days of the Block B dwelling (See Example 2 in Taxation Determination TD 1999/43).