Edited version of private advice

Authorisation Number: 1052003391815

Date of advice: 8 July 2022

Ruling

Subject: CGT - partial main residence exemption

Question 1

Are you entitled to a partial main residence exemption in accordance with section 118-185 of the Income Tax Assessment Act 1997 in relation to the disposal of Residence B?

Answer

Yes

This ruling applies for the following period:

The year ending 30 June 20XX

The scheme commences on:

The year ending 30 June 20XX

Relevant facts and circumstances

1. You and X, were married on DDMMYY.
2. Years later you separated and subsequently divorced with a divorce order taking effect on DDMMYY.
3. On DDMMYY, you and X jointly purchased a matrimonial home (residence A). You and X began living in this home in around MMYY.
4. Residence A was your and X's principal place of residence from MMYY.
5. You and X jointly purchased a one-bedroom unit (Residence B), as an investment property, in MMYY. Residence B was rented out from DDMMYY, shortly after purchase.
6. From MMYY to MMYY, when you moved into Residence B, you and X both lived in Residence A as your main residence.
7. In accordance with the Federal Circuit and Family Court of Australia Court order dated DDMMYY (Court Order), X elected to retain Residence A.
8. The Court Order held that where X retained Residence A:

•         you and X will sell Residence B;

•         pay from the gross sale of Residence B, the agents' commission, costs of sale and the capital gains tax referrable to the sale; and

•         divide the balance equally between you and X.

9. You moved into Residence B in MMYY where you lived alone.
10. In accordance with the Court Order, X will own and continue to reside in Residence A.
11. You ceased contributing to the mortgage over Residence A after DDMMYY.
12. Residence B sold on DDMMYY for $XX to an unrelated party.
13. The settlement for the sale of Residence B is scheduled for DDMMYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

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 118-130

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-192

Reasons for decision

Question 1

Summary

As Residence B was your main residence for only a portion of the ownership period, you are entitled to a partial main residence exemption in accordance with the formula contained in subsection 118-185(2) of the ITAA 1997.

Detailed reasoning

Capital Gains tax event A1

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

In accordance with section 108-5 of the ITAA 1997 both Residence A and Residence B are Capital Gains Tax (CGT) assets, of which you and X each hold a 50% interest. Where two or more individuals own a CGT asset jointly, CGT applies separately to each individual's interest in the asset.

A capital gain or capital loss is made if a GCT event happens to a CGT asset (section 102-20 ITAA 1997), with CGT event A1 occurring when you dispose of your ownership interest in a CGT asset (section 104-10 ITAA 1997). Thus, CGT event A1 will occur in relation to your interest in Residence A ad Residence B when you dispose of your interest in those properties

You are considered to have disposed of a CGT asset if a change of ownership occurs. The capital gain or capital loss is made at the time of the event (s 104-10 of the ITAA 1997).

Main residence exemption

Section 118-110 of the ITAA 1997 provides that an individual can generally disregard a capital gain or loss from a CGT event that happens to their ownership interest in a dwelling that is their main residence.

To be eligible to claim the full exemption, amongst other conditions, the residence must have been your home for the whole period that you owned it (118-110(1)(b) of the ITAA 1997).

Partial main residence exemption

Where a dwelling was your main residence during part of the ownership period only you may be entitled to a partial main residence exemption calculated in accordance with the formula contained in subsection 118-185(2) of the ITAA which works to adjust the capital gain or loss amount calculated on disposal of the property to take into account the proportion of your main residence days in the property to the total number of ownership days in the property.

Section 118-185 states:

Partial exemption where dwelling was your main residence during part only of ownership period

(1)  You get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if:

(a)  you are an individual; and

(b)  the dwelling was your main residence or part only of your ownership period; and

(c)   the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

(2)  You calculate your capital gain or capital loss using the formula:

CG or CL amount × (Non-main residence days ÷ Days in your ownership period)

where:

"CG or CL amount" is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

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

Note: The capital gain or loss may be further adjusted if the dwelling was used to produce assessable income: see section 118-190.

Residence B

As discussed above, Residence B is a CGT asset that you and X both hold a 50% interest in. In accordance with subsections 118-130(2) and 118-130(3) of the ITAA 1997, your ownership interest began on the settlement date following the purchase of the property and your ownership interest ends on the settlement date following the sale of the property.

You and X rented Residence B out as an investment from DDMMYY until DDMMYY, when you moved into the property. You lived there alone from MMYY and will be moving out by DDMMYY. As Residence B was your main residence for only a portion of the ownership period, you are entitled to a partial main residence exemption in accordance with the formula contained in subsection 118-185(2) of the ITAA 1997.

Section 118-190 of the ITAA 1997 does not apply to increase any capital gain and section 118-192 does not apply to change the acquisition date.

Other relevant comments

Residence A

Residence A is a CGT asset that you and X both hold a 50% interest in. In accordance with section 118-130 of the ITAA 1997, your ownership interest in Residence A began in MMYY and will end when you transfer your 50% interest (that is, your legal ownership) to X in accordance with the Court Order.

You ceased living in Residence A in MMYY. During the period from the date you ceased living in Residence A to the date you transfer your legal ownership of Residence A to X, Residence A will not be your main residence for any period that you decide to treat Residence B as your main residence. In that case, you would be entitled to a partial main residence exemption in accordance with section 118-185 of the ITAA 1997 and there would be an amount of capital gain.

Section 126-5 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 (the transferee), or a former spouse (also the transferee), because of certain court orders.

When you transfer your interest in Residence A to X in accordance with the terms of the Court Order, CGT event A1 will occur because of a Court Order and section 126-5 of the ITAA 1997 applies.

The consequences for the transferee are set out in subsection 126-5(5) to 126-5(8) of the ITAA 1997.

Relevantly for you as the transferor, subsection 126-5(4) provides that a capital gain or capital loss the transferor makes from the CGT event is disregarded. There are no relevant exclusions in Division 126 to prevent you disregarding a capital gain or capital loss you make when you transfer your legal ownership to X.