Edited version of private advice

Authorisation Number: 1052004774481

Date of advice: 14 July 2022

Ruling

Subject: CGT - main residence exemption

Question 1

Are you eligible for a full main residence exemption on disposal of the Property?

Answer 1

No

Question 2

Are you eligible for a partial main residence exemption on disposal of the Property?

Answer 2

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You (Person A) your spouse (Person B) and your parent (Person C) jointly purchased a property (the Property).

You purchased the Property many years ago. The Property contained a single dwelling.

A few years ago, the dwelling on the Property was demolished, and the land was subdivided into 2 lots.

The subdivided lots are Property A and Property B.

A dwelling was built on each lot.

A Certificate of Occupancy was granted for the dwelling located on Property B.

The following year, Person B was removed from the title of Property A and Property B.

Several years later, Person C was removed from the titles of Property A and Property B.

At this point, you became the sole owner of Property A and Property B.

You moved into Property B.

The following year, you moved out of Property B and began using it to produce income.

You plan to sell Property B in the near future.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Question 1

Summary

You are not eligible for a full main residence exemption on disposal of Property B.

Detailed reasoning

Section 104-10 of the ITAA 1997 states that CGT event A1 occurs on disposal of a CGT asset. The time of the event is when you enter into a contract for its disposal.

Subsection 108-5(1) states that a CGT asset is any kind of property, or a legal or equitable right that is not property. This includes land and dwellings.

Subsection 118-110(1) of the ITAA 1997states that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

(a)         you are an individual; and

(b)         the dwelling was your main residence throughout 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

Section 118-125 of the ITAA 1997 states that your ownership period of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in a dwelling or the land (acquired on or after 20 September 1985) on which the dwelling is later built.

Application to your circumstances

CGT event A1 will occur when you dispose of Property B. Your ownership interest commenced when you purchased the Property. In accordance with section 118-125 of the ITAA 1997, your ownership interest will commence at the time of purchase of the land, where a dwelling is later built on that land.

The main residence exemption attaches to the dwelling and not the land. Because you acquired the Property in 20XX, but the dwelling on Property B was not completed and ready for occupation until 20XX, you are not eligible for a full main residence exemption on disposal of Property B. This is because the dwelling on Property B was not your main residence throughout your entire ownership period.

Question 2

Summary

You are eligible for a partial main residence exemption on disposal of the Property.

Detailed reasoning

Subsection 118-185 (1) of the ITAA 1997 states that 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 for 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.

Subsection 118-185 (2) of the ITAA 1997 provides the formula for calculating a partial main residence exemption:

Capital gain or loss amount × (non-main residence days ÷ days in your ownership period)

Capital gain or capital loss amount is the capital gain or capital loss you would have made from the CGT event apart from Subdivision 118B of the ITAA 1997.

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

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.

Section 118-135 of the ITAA 1997 states that you can treat a dwelling as your main residence from the time you acquired your interest in it, as long as you move into the dwelling as soon as practicable. If you do not move in as soon as practicable, the dwelling will be your main residence from the time it actually becomes your main residence (rather than from the time of acquisition).

Subsection 118-145(1) of the ITAA 1997 states that if a dwelling that was your main residence ceases to be your main residence, you may continue to treat it as your main residence.

Application to your circumstances

As the dwelling was not your main residence for the entire period of your ownership, you are not eligible for a full main residence exemption on disposal of the dwelling.

As you will use the absence choice in section 118-145 of the ITAA 1997 to extend the main residence exemption, the period from when you move out of Property B in 20XX until you dispose of it can be included in main residence days.

The formula in subsection 118-185(2) of the ITAA 1997 provides the method for calculating a partial exemption.

Question 1

Summary

You are not eligible for a full main residence exemption on disposal of Property B.

Detailed reasoning

To be eligible for a full main residence exemption on disposal of a dwelling, it must have been your main residence for the entire period of your ownership.

Your ownership period is the period on or after 20 September 1985 when you had an ownership interest in a dwelling or the land (acquired on or after 20 September 1985) on which the dwelling is later built.

You can treat a dwelling as your main residence from the time you acquired your interest in it, as long as you move into the dwelling as soon as practicable. If you do not move in as soon as practicable, the dwelling will be your main residence from the time it actually becomes your main residence (rather than from the time of acquisition).

Application to your circumstances

As the dwelling was not your main residence for the entire period of your ownership, you are not eligible for a full main residence exemption on disposal of the dwelling.

Question 2

Summary

You are eligible for a partial main residence exemption on disposal of the Property.

Detailed reasoning

You get only a partial main residence exemption on disposal of your ownership interest in a dwelling if the dwelling was your main residence for only part of your ownership period.

To calculate a partial main residence exemption, use the following formula:

Capital gain or loss amount × (non-main residence days ÷ days in your ownership period)

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.

Application to your circumstances

As the dwelling was not your main residence for the entire period of your ownership, you are eligible for a partial main residence exemption on disposal of the dwelling.

You can nominate the dwelling as your main residence for the period from when you moved out and commenced using the dwelling to produce income. However, you will still only be eligible for a partial main residence exemption as the dwelling was not your main residence for the entire period of your ownership.