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Edited version of your written advice
Authorisation Number: 1051369799803
Date of advice: 9 May 2018
Ruling
Subject: Main residence exemption
Question 1
Will the capital gains arising from the sale of the property for Individual A and Individual B be disregarded in accordance with Sections 118-110 and 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following period:
30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
Individual A and Individual B acquired the property located at XXX Street, Suburb A, State B mid 201X
You moved into the property late 201X
You lived in the property as your main residence from late 201X until early 201X
Early 201X the property was leased out to an unrelated third party
In the middle of 201X Individual C purchased Y% of the property
The structure of ownership became Individual A and Individual B as joint tenants holding a XX% share as tenants in common in unequal shares with Individual C holding the Y% share
You have chosen not to treat any other property as your main residence for the ownership period
You entered into a contract for the sale of the property on the mid 201X
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-145
Reasons for decision
A capital gain or capital loss an individual makes from a Capital Gains Tax (CGT) event that happens to a dwelling is disregarded under section 118-110 of the ITAA 1997 if the dwelling was the taxpayer's main residence throughout the period it was owned.
The main residence exemption can apply to up to 2 hectares of land adjacent to a dwelling if the land was used primarily for private or domestic purposes in association with the dwelling: section 118-120 of the ITAA 1997.
Section 118-145 of the ITAA 1997 provides that you can continue to treat a dwelling as your main residence during periods of absence. If the dwelling is not used to produce income it can be treated as your main residence indefinitely (subsection 118-145(3) of the ITAA 1997).
If the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is six years (subsection 118-145(2) of the ITAA 1997). You are entitled to another period of six years each time the dwelling again becomes your main residence and then commence using it again to produce income.
If you make this choice, you cannot treat any other dwelling as your main residence while you apply this section.
It is possible for legal ownership to differ from beneficial ownership. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset and it is the beneficial owners rather than the legal owners of a CGT asset that are liable for CGT upon sale of the asset.
This is relevant in this case as the legal owners, being Individual B and yourself, caused a change in the legal owners when you sold a Y% share to Individual C, however this did not negate your beneficial ownership and the related benefits and obligations.
Therefore, as you retained beneficial ownership, you are both able to claim the CGT main residence exemption.