Edited version of private advice

Authorisation Number: 1051970686259

Date of advice: 14 April 2022

Ruling

Subject: Main residence exemption - multiple properties

Question 1

Are you entitled to a partial main residence exemption when you sold property A on DDMMYYYY?

Answer

Yes.

Question 2

Can you apply the six-year absence rule to property A from DDMMYYYY to DDMMYYYY?

Answer

Yes.

Question 3

Can you disregard your share of any capital gain or capital loss when you sold Property C, on DDMMYYYY?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You have acquired ownership interest in multiple properties.

Property A

You purchased property A on DDMMYYYY having 100% legal ownership interest.

You moved in as soon as practical and treated this as your main residence.

You moved out on DDMMYYYY.

You continued to treat this dwelling as your main residence once you moved out, from DDMMYYYY to DDMMYYYY.

The property commenced producing income from DDMMYYYY.

You did not move back into the property.

The property stopped producing income on DDMMYYYY.

The property sold on DDMMYYYY and settlement occurred DDMMYYYY.

Property B

You purchased property B on DDMMYYYY having 50% legal ownership interest.

You did not move in as soon as practical after acquisition and settlement date.

You moved to property C and you rented out the dwelling for approximately 18 months.

You moved back in and are treating this dwelling as your main residence from DDMMYYYY to present day.

This property has not been sold.

Property C

You purchased property C on DDMMYYYY having 50% legal ownership interest.

You moved in as soon as practical after acquisition.

You moved out on DDMMYYYY and moved back into property B.

The property did not produce income.

You have elected not to treat this dwelling as your main residence during your ownership period.

The property sold on DDMMYYYY and settlement occurred DDMMYYYY.

Your ownership interest was less than 12 months.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-192

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Detailed reasoning

Question 1 and 2 - Property A

Summary

You are entitled to a partial main residence exemption and the capital gains discount during your ownership period when property A was used for the purpose of producing assessable income during your absence of more than six years.

Main residence exemption

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence when the following conditions have been met under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997):

•         The dwelling must have been your main residence for the whole period you owned it;

•         You must not have used the dwelling to produce assessable income; and

•         Any land on which the dwelling is situated must be 2 hectares or less.

If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time.

Moving into a dwelling

For the main residence exemption to apply to your whole ownership period, you must move into the dwelling as soon as practicable after you purchase the dwelling - section 118-135 of the ITAA 1997.

Also, section 118-135 extends the main residence exemption to take account of the time needed to move into a dwelling. It includes the period from when you acquired the main residence (generally the date of settlement) to when it was first practicable to move into the dwelling after it was acquired. This is to take account of situations where, for example, there is a delay in moving because of illness or other similar cause beyond your control.

Home first used to produce income

If you start using your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss under section 118-192 of the ITAA 1997.

You are taken to have acquired your home at its market value at the time it is first used to produce income if all of the following apply:

•         You acquired your dwelling on or after 20 September 1985;

•         You first used the dwelling to produce income after 20 August 1996;

•         When a capital gains tax (CGT) event occurs, you would only obtain a part exemption because your dwelling was used to produce assessable income during the period you owned it; and

•         You would have been entitled to a full exemption if the CGT event had happened to your dwelling immediately before you first used it to produce income.

If all of the above conditions apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have the option of using a different calculation method.

Section 118-192 was introduced to reduce compliance and record-keeping costs for taxpayers. However, in some cases the rule may disadvantage a taxpayer (for example if the value of the property increases more rapidly after income producing use). Also costs incurred to enable the dwelling to be used to derive assessable income are not able to be included in the cost base and may not be reflected in the market value. Likewise costs of owning the asset, such as mortgage interest, incurred before the time of first income use cannot be included in the cost base under this rule.

Absence choice

In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it under section 118-145 of the ITAA 1997.

The absence provision allows a dwelling that has qualified as the taxpayer's main residence to continue to be treated as the taxpayer's main residence during a period of absence from the dwelling.

Where the concession is chosen, a dwelling can be treated as the taxpayer's main residence for up to six years of absence when the dwelling is being used to produce assessable income e.g., being rented out.

Once the absence choice has been made, no other dwelling can be treated as your main residence for the period during which you apply the absence provision.

Partial 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.

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption.

To obtain a partial main residence exemption, you must have initially established the dwelling as your main residence. Where the dwelling is used to produce income, you can nominate the dwelling as your main residence for up to six years before your full exemption is reduced. The six-year period will start again if you move back into the dwelling and re-establish it as your main residence, before using it for another period of income production.

You calculate your capital gain using the following formula:

Capital gain x Non-main residence days

Total number of days in your ownership period

Discount capital gain

A discount capital gain applies if certain conditions are met under Division 115 of the ITAA 1997. Section 115-5 of the ITAA 1997 states a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

Section 115-25(1) of the ITAA 1997 states to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Application to your circumstances

You acquired sole ownership of property A on DDMMYYYY and moved in when first practicable after settlement.

Your total ownership period was over XX years.

You purchased property B while living at property A, and continued to treat property A as your main residence for a period of time.

You moved out of property A on DDMMYYYY, and moved into property B.

Property A produced income for over seven years, which exceeds the six-year maximum period allowed to be absent from a dwelling that you still treat as a main residence.

You have elected property A as your main residence from DDMMYYYY - DDMMYYYY, encompassing the period you lived in the property and approximately X.X years during which time you applied the absence rule. From DDMMYYYY - DDMMYYYY property A is not your main residence and you are not exempt from paying tax on any capital gain for this period.

You are entitled to a partial main residence exemption on your total ownership period and will need to calculate your capital gain using the partial main residence exemption. In addition, because property A was first used to produce income from DDMMYYYY, you satisfy the conditions under section 118-192 and you must work out your capital gain using the market value of the dwelling on DDMMYYYY.

You will have a discount capital gain pursuant to the provisions contained in Division 115A, and will be able to apply the discount percentage to your discount capital gain because you held your ownership interest in property A for more than 12 months before you disposed of the dwelling on DDMMYYYY.

Any capital gain or capital loss incurred will need to be reported in your income tax return for the income period 20XX-XX.

Question 3 - Property C

Summary

You are not eligible to apply the main residence exemption or the capital gains discount when you sold your 50% share of your ownership interest.

Application to your circumstances

You purchased property C on DDMMYYYY with 50% joint ownership interest and moved in as soon as practicable after settlement.

Generally, only one property can be your main residence at a time. You were treating property B as your main residence while residing at property C. Therefore, you cannot apply the main residence exemption to property C.

You also cannot apply the capital gains discount to your share of your ownership interest because your ownership period was not at least one year. As described in Taxation Determination (TD) 2002/10, the words 'at least' in section 115-25(1) requires a clear period of 365 whole days (366 whole days in a leap year) to elapse between the day on which the CGT asset was acquired and the day on which the CGT event happens.

As stated in the example at paragraph 5 of TD 2002/10 the taxpayer acquired an asset on 2 February 2001 and disposed of the asset on 2 February 2002. A clear year starts on 3 February 2001 (date of acquisition is excluded) and ends at the end of 2 February 2002.

Therefore, in your case, a clear year did not elapse between when you acquired property C to when you sold the property.

Any capital gain or capital loss incurred for your share of your ownership interest will need to be reported in your income tax return for the income period 20XX-XX.

In conclusion

Generally, you can disregard a capital gain or capital loss when you dispose of your main residence. In your case, you owned multiple properties over a period of time, but you only treated one dwelling at any one time as your main residence. Therefore, you are able to apply a partial main residence exemption and the CGT discount to property A, when you disposed of this property.

The main residence exemption does not apply to property C because you were treating another dwelling as your main residence. The CGT discount also does not apply because you held your ownership interest for less than 12 months.

Property B has not been sold, and you are presently treating this dwelling as your main residence from DDMMYYYY to present day.