Edited version of private advice

Authorisation Number: 1052047026646

Date of advice: 24 October 2022

Ruling

Subject: CGT - main residence exemption

Question 1

Are you entitled to a full main residence exemption on property A?

Answer

Yes

Question 2

Are you entitled to a partial main residence exemption on property B when you decide to sell it?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You signed a contract for the purchase of property A a few years ago.

The settlement date was XX/XX/20XX.

The sale of your former main residence and family home settled on the same day.

You moved into property A on the day your purchase of the property settled and used a removalist to move your belongings.

You intended to move into property A as your main residence.

You connected gas and electricity at property A.

You insured property A under an owner occupier insurance policy.

After you had lived there for a period there was a change in circumstances, and you realised property A was not suitable to be your home long term.

Consequently, you moved into a rental property located in another area.

You rented out property A.

You decided to use the 6-year absence rule while property A was being rented to continue to treat property A as your main residence.

Later you decided to look for another property and you decided on Property B and purchased it.

You took possession of property B on XX/XX/20XX.

You gave the tenants in property A notice to vacate.

You moved back into property A on XX/XX/20XX and intended to live in property A for 3 months because you wished to meet the 3-month residence requirement of the 6-month changing main residence rule.

You intend to sell property A within 6 months.

You will treat property A as your main residence until you sell it.

Once property A is sold you will move into Property B and treat property B as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 section 118-145

Reasons for decision

You make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. CGT events are those transactions that occur to a CGT asset that result in you either making a capital gain or capital loss.

You make a capital gain if your capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if you receive more for an asset than you paid for it.

You make a capital loss if your reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset, for example, if you receive less for an asset than you paid for it.

Capital gains tax is not a separate tax, it forms part of your assessable income and is taxed at your marginal tax rate.

CGT - main residence

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

Whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to:

• the length of time the taxpayer has lived in the dwelling
• the place of residence of the taxpayer's family
• whether the taxpayer has moved his or her personal belongings into the dwelling
• the address to which the taxpayer has his or her mail delivered
• the taxpayers address on the Electoral Roll
• the connection of services such as telephone, gas and electricity
• the taxpayer's intention in occupying the dwelling

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

Moving into the dwelling

To establish a dwelling as a main residence you must move in as soon as practicable. The term as soon as practicable is used in section 118-135 of the ITAA 1997 to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the property became your main residence on the date you acquired it (that is, you would have to physically move in on that day).

In your case you moved into property A on the day your purchase of the property settled. You used a removalist to move your belongings into the property on that date. You intended that property A to be your main residence. You had all the services connected.

After you had lived there for a period there was a change in circumstances, and you realised property A was not suitable to be your home long term. Consequently, you decided to move out and rent a more suitable property.

You rented property A out and you used the absence rule to continue to treat property A as your main residence.

You intend selling property A and will treat it as your main residence until it is sold.

Based on the facts provided property A was your main residence from when you moved into the property on the day your purchase of the property settled.

Changing Main Residences

Subsection 118-140(1) of the ITAA 1997 states that if you acquire an ownership interest in another property and intend to use it as your main residence, you are able to treat your original property and your newly acquired property as your main residences for a maximum period of 6 months.

Subsection 118-140(2) of the ITAA 1997 states that the exemption outlined in subsection 118-140(1) of the ITAA 1997 only applies if:

(a)  Your original main residence was your main residence for a minimum of 3 months in the 12 months prior to the disposal of it, and

(b)  You did not use it to produce assessable income in any part of those 12 months when it was not your main residence.

You will not be able to use the 6-month changing main residence rule as you rented property A out before moving back into it and consequently will not meet the requirement in paragraph 118-140(2)(b) of the ITAA 1997 set out above. Although you were able to use the absence rule while you rented the property out, this does not mean the fact it was rented out is disregarded for the purposes of paragraph 118-140(2)(b) of the ITAA 1997.

You will be subject to CGT when you decide to sell property B for the period prior to you moving into property B and establishing it as your main residence. That is, you will get a partial main residence exemption for property B when you decide to sell it.