Edited version of private advice

Authorisation Number: 1052062145266

Date of advice: 12 December 2022

Ruling

Subject: CGT - main residence exemption

Question

Can you claim the main residence capital gain tax exemption under section 118-110 of the Income Tax Assessment Act 1997 on the sale of the property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse purchased a property (dwelling).

The sole purpose of the purchase was to provide accommodation for your child and their family who moved into the property immediately after settlement and who occupied the property for the full period as their main residence until it was sold.

You and your spouse financed the purchase as your child and their spouse could not qualify for finance.

You and your spouse had a verbal agreement with your child and their spouse that they would treat the property as their own and during their occupancy they made several modifications including refurbishing the kitchen and bathroom at their own cost.

Your child and their spouse paid all property expenses including rates, utility charges and loan repayments.

Your child and their spouse made the decision to sell the property and handled all communication with the selling agent. They also received all net proceeds from the sale of the property after costs and the mortgage discharge.

You and your spouse never resided in the dwelling nor obtained any financial benefit from the disposal of the property.

You and your spouse considered the transaction to be a gift to your child and their family.

Relevant legislative provisions

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

Reasons for decision

You cannot claim the main residence capital gain tax exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of the property.

Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. Section 108-5 lists land and buildings as CGT assets.

Under section 104-10 of the ITAA 1997, a CGT event A1 occurs when you dispose of a CGT asset to someone else.

Main residence exemption:

Subdivision 118-B of the ITAA 1997 allows taxpayers to ignore a capital gain or loss made from a CGT event that occurs with regards to a dwelling that is their main residence (main residence exemption).

The basic rules that must be satisfied in order for a taxpayer to be eligible for the main residence exemption are provided in section 118-110 of the ITAA 1997. Specifically, subsection 118-110(1) provides that a capital gain or loss from a CGT event in relation to a taxpayer's main dwelling, or ownership interest in it, is disregarded if:

a.            the taxpayer is an individual; and

b.            the dwelling was the individual's main residence throughout the ownership period, and

c.             the interest did not pass to the individual as a beneficiary in, and was not acquired as a trustee of, a deceased estate.

Subsection 118-130(2) of the ITAA 1997 further explains that where land or a dwelling is acquired under a contract, a taxpayer will acquire an ownership interest in it from:

a.            the time the taxpayer obtains legal ownership, or

b.            if the contract, or related contract, gives the taxpayer a right to occupy the asset at an earlier time, then the earlier time.

Application to your circumstances

We acknowledge the circumstances and reasons which led you to put the property title under your name and provide accommodation for your child and their family. However, you were the legal owner of The Property when it was acquired, throughout the period of its ownership and at the time of the disposal. You never resided at The Property.

As The Property has never been established as your main residence, section 118-110 of the ITAA 1997 will not apply to exempt any capital gain or loss that results from the disposal of The Property from being assessable in the year it was disposed.