Edited version of your written advice

Authorisation Number: 1051445359647

Date of advice: 24 October 2018

Ruling

Subject: Main residence exemption

Question 1

Can you apply the main residence exemption for Capital Gains Tax purposes on the sale of your property?

Answer

No

Question 2

Can you apply a partial residence exemption for Capital Gains Tax purposes on the sale of your property?

Answer

Yes

This ruling applies for the following period:

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a property with your spouse with full intention that it would be your primary place of residence.

You were considered joint tenants of the property.

You commenced working for a school.

Your terms of employment required you to live on site.

The school provided on-site accommodation that you were required to rent.

You and your spouse rented out the property as you were unable to live off-site.

You commenced work with a new employer as a caretaker.

This position also required you to live on site.

The property continued to be rented out.

Due to dissatisfaction with the provided accommodation your spouse decided to move in to your property.

Your spouse moved into the property and stayed for X months.

Your spouse moved back to the caretaker position accommodation.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997.

Subsection 100-10(1) of the ITAA 1997

Subsection 100-20(3) of the ITAA 1997

Subdivision 118B of the Income Tax Assessment Act 1997

Section 118-100 of the ITAA 1997

Section 118-135 of the ITAA 1997

Section 118-170 of the ITAA 1997

Section 118-185 of the ITAA 1997

Reasons for decision

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 under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

The most common event is CGT event A1 which happens under section 104-10 of the ITAA 1997 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.

According to subsection 100-10(1) of the ITAA 1997 your net capital gain is the total of your capital gains for the income year, reduced by any capital losses that you have made.

CGT event

If a CGT event involves a contract, the time of the event is when the contract is made, not when it is settled (subsection 100-20(3) of the ITAA 1997). If there is no contract, the time of the event is when the change of ownership occurs.

Real estate is a CGT asset. When selling a property, the CGT event occurs at the date of the contract of sale.

When a dwelling becomes your main residence

Subdivision 118B of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss you make from a capital gains tax (CGT) event that happens to a dwelling that is your main residence, can be ignored. Section 118-100 of the ITAA 1997 provides that this exemption does not apply in full if:

● It was your main residence during part only of your ownership period; or

● It was used for the purpose of producing assessable income.

Section 118-135 of the ITAA 1997 provides that if you move in as soon as practicable after acquiring your ownership interest, then the dwelling is treated as your main residence from when the interest is acquired until it actually became your main residence. The Commissioner’s view of the phrase “as soon as practicable” is presented in Tax Determination 92/147. As soon as practicable means that, unless there are unforeseen circumstances, or events happen beyond your control you must move into the dwelling as soon as possible.

Where section 118-135 of the ITAA 1997 does not apply because taxpayer does not move into a residence as soon as practicable, the residence will only be treated as their main residence for CGT purposes from the date they actually move into the dwelling.

In your circumstances, you purchased the Property, which settled on XX/XX/20XX (the date at which you gained the ownership interest). You leased the Property to an unrelated party to XX/XX/ 20XX your spouse moved into the property XX/XX/20XX on her own. You chose to remain in accommodation provided by your employer, therefore neither you nor your spouse cannot be considered to have moved in to the Property as soon as practicable and the Property will not be treated as your main residence for CGT purposes from the date you acquired it under section 118-135 of the ITAA 1997.

Accordingly, the property was not your main residence for your entire ownership period and you are not entitled to a full main residence exemption.

Question 2

Summary

You are entitled to a partial exemption.

Detailed reasoning

Spouse having different main residence

If, during a period a dwelling is your main residence and another dwelling is the main residence of your spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:

● choose one of the dwelling as the main residence of both of you for the period, or

● nominate the different dwellings as your main residences for that period.

Your spouse includes another person (of any sex) who:

● you were in a relationship with that was registered under a prescribed state or territory law

● although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

There is nothing to prevent either spouse from nominating the other's dwelling as their main residence even though they do not have an ownership interest in that dwelling.

The effect and intent of section 118-170 of the ITAA 1997 is that a couple will not obtain the benefit of the main residence exemption for two dwellings for periods they may or may not maintain separate main residences.

As you have never lived in the property you have the right under 118-170 to nominate the residence as your main residence from the time your spouse moved into the property.

Absence rule

Section 118-145 of the ITAA1997 provides that if a dwelling was your main residence, you may continue to treat it as your main residence. If you use your main residence to produce assessable income, the maximum that you can treat it as your main residence is six years. If you make the choice to treat the dwelling as your main residence whilst you are absent, you may not treat any other dwellings as your main residence whilst you choose to use the absence exemption in section 118-145 of the ITAA 1997.

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:

● non-main residence days is the number of days in your ownership period when the dwelling was not your main residence and

● the ownership period for capital gains tax purposes is from the date of settlement of the contract to purchase the property until the date of signing of the contract of sale of the property.