Edited version of private advice

Authorisation Number: 1051792608246

Date of advice: 21 December 2020

Ruling

Subject: Capital gains tax

Question

Where you move back into your property on or before xxxx and the property remains your main residence until sale, is the capital gain or capital loss disregarded?

Answer

Yes.

This ruling applies for the following periods

Years ended 30 June 20XX to 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You and your ex-spouse jointly purchased a property on xxxx.

The property of xxx square metres.

You and your ex-spouse lived together in the property as your main residence from the purchase date until your separation in xxxx.

In late xxxx, your ex-spouse lived in a separate property and you continued to live in the property until mid xxxx.

At this time, your ex-spouse moved back into the property and you moved out. During your separation, your child continued to live at the property with either you or later your ex-husband approximately xx% of the time. This arrangement continued until xxxx when your ex-spouse advised he was moving out of the property. As you were not in a position to move back into the property at that time, the property was rented out four weeks later in xxxx.

From the time of purchase, you have continued to perform maintenance work on the property and contribute to maintenance and other costs. You continued to use the property address as your mailing address and continued to have some personal items stored at the property until the tenants moved in during xxxx.

The property or any part of it had not been rented at all before xxxx.

Your divorce was granted on xxxx. The financial settlement for your divorce will include a payment by you to your ex-spouse in exchange for transfer of the property title to your name only. The property transfer is part of the court orders under the Family Law Act 1975.

The tenants currently hold a xx lease on the property and may continue to rent the property after that.

You do not own any other real estate. Your ex-spouse also has never previously and does not currently own any other real estate.

Assumptions

You will move back into the property with the property.

You will then dispose of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

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 118-145

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 subdivision 126-A

Income Tax Assessment Act 1997 section 126-5

Reasons for decision

Capital gains tax

Under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997), assessable income also includes statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997).

The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity.

The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997).

Main residence exemption

Generally, an individual can disregard a capital gain or loss from a CGT event that happens to their ownership interest in a dwelling that is their main residence.

Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. The maximum area of adjacent land covered by the exemption is two hectares.

To get the full exemption from CGT:

•         The residence must be your home for the whole period that you owned it (paragraph 118-110(1)(b) of the ITAA 1997).

•         You must not have used the dwelling to produce assessable income (unless the temporary absence rule in section 118-145 of the ITAA 1997 applies) (section 118-190 of the ITAA 1997).

For the main residence exemption to apply for your whole ownership period, you must move into the dwelling as soon as practicable after you acquire the dwelling.

Absence rule

As a general rule, a dwelling is no longer your main residence once you stop living in it. However under section 118-145 of the ITAA 1997you may choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it.

This choice needs to be made only for the income year that the CGT event happens to the dwelling, for example the year that you enter into a contract to sell it.

Under subsection 118-145(2) of the ITAA 1997, if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

However if you make this choice, you cannot treat any other dwelling as your main residence while you apply this section.

In your case where you do not live in your main residence and use your property to produce assessable income for up to 6 years and satisfy the above requirements, you will still be entitled to the full main residence exemption when you sell your main residence. The 6 year period begins when you started to use your main residence for the purpose of producing assessable income in xxxx.

Marriage breakdown and roll-over

CGT generally applies to all changes of ownership of assets on or after 20 September 1985. However, subdivision 126-A of the ITAA 1997 outlines the circumstances where a capital gain may be disregarded following a marriage breakdown.

If certain conditions are met there is an automatic roll-over of the capital gain for the transferring spouse if a CGT event happens as a result of a marriage breakdown.

Subsection 126-5(1) of the ITAA 1997 provides that there is a roll over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse or former spouse (the transferee) because of:

(a) a court order under the Family Law Act 1975 (FLA) or under a state law, territory law or foreign law relating to breakdowns of relationships between spouses; or

(b) a maintenance agreement approved by a court under section 87 of the FLA or a corresponding agreement approved by a court under a corresponding foreign law; or

(d) something done under:

•         a financial agreement made under Part VIIIA of the FLA that is binding because of section 90G of that Act; or

•         a corresponding written agreement that is binding because of a corresponding foreign law; or

•         (da) something done under:

•         a Part VIIIAB financial agreement (within the meaning of the FLA 1975) that is binding because of section 90UJ of that Act; or

•         a corresponding written agreement that is binding because of a corresponding foreign law; or

(e) something done under:

•         an award made in an arbitration referred to in section 13H of the FLA 1975; or

•         a corresponding award made in an arbitration under a corresponding State law, Territory law or foreign law; or

(f) something done under a written agreement:

•         that is binding because of a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; and

•         that, because of such a law, prevents a court making an order about matters to which the agreement applies, or that is inconsistent with the terms of the agreement in relation to those matters, unless the agreement is varied or set aside.

If your case, the requirements of subsection 126-5(1) of the ITAA 1997 are met and the marriage or relationship breakdown rollover applies. When the property is transferred to you, you're taken to have acquired the property at your ex-spouse's cost base, at the time it was transferred to you.

When you eventually dispose of the asset, a CGT event will occur.

To determine if you are entitled to a main residence exemption on the sale of the property, you take into account the way in which each of you used the dwelling during your respective periods of ownership.

In your circumstances and using the absence rule under section 118-145 of the ITAA 1997, the property was regarded as your ex-spouse's main residence during his full ownership period.

Where you move back into the property on or before xxxx and dwell in the property as your main residence until the sale of the property, the property is also regarded as your main residence for your full period of ownership.

Therefore you will be entitled to a full exemption from CGT on your 100% ownership of the property when you dispose of the property, providing you do not treat any other dwelling as your main residence during your period of ownership of the property.