Edited version of private advice

Authorisation Number: 1051982464650

Date of advice: 13 July 2022

Ruling

Subject: CGT - main residence exemption

Question

Are you considered to be living permanently and separately apart from Person B for the purposes of subsection 118-170(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for the period before the relationship broke down?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

30 June 20XX

Relevant facts and circumstances

Person A and Person B were married many years ago.

They lived together for several years in City A.

They purchased a property (Property A) in City A.

Property A was bought as tenants-in-common. The reason for this was that Person A and Person B had agreed to reside in different dwellings.

Person B has lived at Property A since its purchase.

Person A continued to live at a rented property with their children from their first marriage.

Mortgage repayments for Property A were primarily paid by Person B. Expenses in relation to the property were paid from joint accounts

Some time later, Person A and Person B purchased a property (Property B).

They purchased Property B as tenants-in-common in equal shares. The property was purchased as tenants in common as Person A and Person B had agreed to continue to reside in separate dwellings.

Person A has lived at Property B from the time of purchase.

Mortgage repayments for Property B were primarily paid by Person A and expenses in relation to the property were paid from joint accounts.

The relationship between Person A and Person B has broken down. They have agreed to divide their property interests under the relevant legislative act. Person A plans to transfer their interest in Property B to Person B. Person B plans to transfer their interest in Property B to Person A.

Within several months of the relevant court orders being made, Person A plans to sell Property B.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-170

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

You are not considered to be living permanently separately and apart from Person B for the purposes of subsection 118-170(1) of the ITAA 1997 for the period before the relationship broke down.

Detailed reasoning

Spouses and separate main residences

The original provision regarding spouses and separate main residences was contained in subsection 9 and 10 of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsections 160ZZQ(9) of the ITAA 1936 is the relevant section and is reproduced below:

Subsection 9 is as follows:

Where -

(a)         a dwelling is the sole or principal residence of a taxpayer at a particular time, and

(b)         at that time, another dwelling is the sole or principal residence of the taxpayer's spouse or of a

dependent child of the taxpayer,

whichever of those dwellings is nominated by the taxpayer and the taxpayer's spouse, or by the taxpayer, as the case may be, shall, for the purposes of this section, be deemed to be the sole or principal residence of the taxpayer and the taxpayer's spouse, or the taxpayer and the dependent child of the taxpayer, as the case may be, at that time.

No amendments occurred to subsection 160ZZQ(9) during the period it had effect

Section 118-170 of the Income Tax Assessment Act 1997 (ITAA 1997) is a re-written form of the former subsection 160ZZQ(9) and (10) of the ITAA 1936.

The introduction to subsection 118-170(1) of the ITAA 1997 provides that the section applies to relationships between spouses, except spouses living permanently separately and apart from each other.

Subsection 118-170(1) of the ITAA 1997 was inserted into the ITAA 1997 by the Tax Law Improvement Act (No 1) 1998 and is still in its original form.

Section 118-170(1) of the ITAA 1997 provides that:

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:

(a) choose one of the dwellings as the main residence of both of you for the period; or

(b) nominate the different dwellings as your main residences for the period.

If you nominate the different dwellings as your main residences for the period, you split the exemption in accordance with subsections (3) and (4) of section 118-170 of the ITAA 1997.

Subsection 118-170(3) of the ITAA 1997 provides that if your interest in a dwelling was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your main residence during the period.

The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 doesn't state that any change in interpretation was intended by the re-write. It states:

Spouse or dependent child having different main residences

Generally, if an individual lives in one dwelling and their spouse or dependent child lives in another, only one of the dwellings can be nominated as the main residence. Special rules apply if spouses nominate different main residences for the same period.

If a spouse lives permanently separately and apart from the taxpayer, the CGT main residence exemption will apply individually to each party.

If a spouse does not live permanently separately and apart from the taxpayer, the exemption will be split in accordance with the relevant subsection in 118-170 of the ITAA 1997:

Definition of spouse

Spouse was not a defined term in 1986, so took its ordinary meaning. The ordinary meaning of the word spouse does not indicate that spouses must be living together. In relation to spouses who are married, it is enough that they be legally married, and that the marriage has not been dissolved.

Spouse' was also not defined in the Acts Interpretation Act 1901 at this time. A definition of 'spouse' was introduced into subsection 6(1) of the ITAA 1936 in 1990 by the Tax Laws Amendment Act 1990. The definition of 'spouse' then read:

'spouse' in relation to a person, includes another person who, although not legally married to the person, lives with the person on a bona fide domestic basis as the husband or wife of the person

The Explanatory Memorandum to the Tax Laws Amendment Bill (No. 5) 1990

The Schedule will also insert a definition of "spouse", to include a de facto spouse, in subsection 6(1). With the exception of those provisions in the Assessment Act in which a de facto spouse is specifically included within the meaning of spouse of a person, the term "spouse" takes its common law meaning of a partner in a legal marriage. The insertion of a definition of "spouse" to include a de facto spouse will remove, as far as possible, discrimination between legally married spouses and de facto spouses where the latter would otherwise be treated as single.

The current definition of 'spouse' was inserted into subsection 6(1) of the ITAA 1936 by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006. It merely aligns the ITAA 1936 with the ITAA 1997.

Originally, the definition of 'spouse' in subsection 995-1(1) of the ITAA 1997 mirrored the definition that then existed in the ITAA 1936.

The definition of 'spouse' in its current form was inserted into the ITAA 1997 by the Same-Sex Relationships (Equal Treatment in Commonwealth Laws - General Law Reform) Act 2008.

A 2011 amendment merely updated a reference to the Acts Interpretation Act 1901.

The current definition of 'spouse reads:

spouse of an individual includes:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a *State law or *Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

When are you living permanently separately and apart?

The phrase 'living permanently and separately apart' is not defined in the legislation. There is also very limited judicial discussion on the meaning of the phrase.

However, the available jurisprudence highlights that the relevant test for determining whether the criteria is met requires consideration of how spouses live and not merely where they live.

This means that the mere fact that spouses live in separate dwellings is not sufficient to conclude that they are living permanently and separately apart. Spouses may be considered to be living separately even while residing in the same dwelling.

It is therefore necessary to also consider how they live. This may include consideration of how financial affairs are arranged and how each party contributes to the maintenance of the other party.

Previous case law has highlighted that in situations where spouses are married, it is unlikely that there can be said to be no contribution to the maintenance of the other spouse.

Application to your circumstances

You and Person B are spouses based on the relevant legislative definition. To determine whether you are living permanently separately and apart, it is necessary to look at the way that you live, as well as where you live.

The test for determining this is based on how each spouse lives, and not merely where they reside.

Although you have always resided in a different dwelling from your spouse from the time of purchase of your dwelling, we do not consider that you are living permanently, separately, and apart from Person B. The test is based on how each spouse lives and not merely where you reside. The place of residence is only one element of 'living'.

Something more than merely living in separate dwellings is required before spouses are considered to be living permanently separately and apart. Although you were physically separated, you were still in a marital relationship as spouses.

You and Person B pay expenses toward both properties from a joint account. You have been married for a period of approximately XX years. You purchased both properties together following your joint decision to reside in separate dwellings. You are primarily responsible for paying the mortgage associated with Property B. Looking at the available information, we consider that although residing separately, you are not living permanently and separately apart from Person B.

As your original interest in Property B is 50% or less of the total interests in the dwelling during the relevant period, that dwelling is taken to be your main residence during the period.

On disposal of Property B, you will be eligible for a full main residence exemption in respect of your original 50% ownership interest Property B.

However, you will only be entitled to a partial main residence exemption in relation to the 50% interest in Property B you receive from Person B. Your total ownership period will include the period that this interest was owned by Person B and Property B was never their main residence.