Edited version of private advice

Authorisation Number: 1051745311745

Date of advice: 8 September 2020

Ruling

Subject: Capital gains tax - main residence exemption

Question 1

Will there be a CGT consequence if your spouse's name is added to the legal title of your property?

Answer

Yes

Question 2

Are you entitled to a partial main residence exemption on your dwelling?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You inherited a property in 20xx.

The title was transferred into your name only as you were the sole beneficiary of the will.

The property had an old building which was left vacant from 20xx to 20yy.

In 20yy, you and your spouse decided to rebuild.

You demolished the old building and built a new dwelling with funds that included your spouse's contribution.

The new house was used as a holiday house for your sole use from 20yy to 20zz.

From 20zz the new house became your main residence.

Your main residence before 20zz was in a different location.

You wish to add your spouse's name to the legal title.

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 108-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118- 185

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.

Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property.

Subsection 104-10(3) of the ITAA 1997 provides that you dispose of a CGT asset when you either enter into a contract for its disposal, or where no contract exists, when the change of ownership occurs.

A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation. However, it is possible for legal ownership to differ from the beneficial ownership.

Subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base and you make a capital loss if those capital proceeds are less than the asset's reduced cost base.

In this case, the title was transferred into your name only as you were the sole beneficiary of the will; you wish to add your spouse's name to the legal title. It will trigger CGT event A1 and there will be a CGT consequence.

Main residence exemption

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any gain or loss arising from a CGT event that occurs in relation to that dwelling.

In this case, the new dwelling was built in 20yy and it was used as your holiday house 20yy to 20zz. From 20zz, the new dwelling became your main residence. Before 20zz your main residence was in a different location. Therefore, you are entitled to a partial main residence exemption.

Information on how to calculate the portion of the capital gain that is taxable is available on our website www.ato.gov.au (search QC 52197 - Transferring real estate to family or friends).