Edited version of private advice

Authorisation Number: 1052093365665

Date of advice: 21 March 2023

Ruling

Subject: CGT - main residence

Question 1

Are you entitled to the full main residence exemption on the disposal of 20% of your ownership interest in the property pursuant to section 118-110 of the Income Tax Assessment Act 1997?

Answer

Yes.

You are eligible for the full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 in relation to your disposal of a 20% interest in the dwelling and the associated 2 hectares of land. Any capital gain or capital loss will be disregarded.

Question 2

If you move out of the property after you have disposed of 20% of your ownership interest, are you eligible to continue to treat the property as your main residence and be eligible for the full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997?

Answer

Yes.

You can continue to treat the property as your main residence for up to 6 years under section 118-145 of the Income Tax Assessment Act 1997 and remain eligible for the full main residence exemption for the dwelling and the associated 2 hectares of land.

Question 3

If you are not eligible for the full main residence exemption, are you eligible for a partial main residence exemption under Subdivision 118-B and market value substitution of the cost base under section 118-192 of the Income Tax Assessment Act 1997 even though you are absent from the property?

Answer

Yes.

You will be eligible for a partial main residence exemption under section 118-190. The special rule in section 118-192 would apply and you would be taken to have acquired your ownership interest for its market value at the time you first used the property for income producing purposes. However, these provisions will not apply if you are eligible for the full main residence exemption because you continue to treat the property as your main residence under section 118-145 of the Income Tax Assessment Act 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the sole owner of the property.

The property consists of a house, the land upon which the house is situated, and adjacent land. The property covers a land area of XX hectares.

You acquired your ownership interest in the property after 20 September 1985.

You have lived in the property as your main residence since you acquired it. You have no other property which you have claimed as a main residence during this period.

You are a resident of Australia for taxation purposes and have been an Australian resident for taxation purposes for your entire ownership period of the property.

You intend to sell a 20% interest in the property to Person A. You intend to use the sale proceeds to repay personal debts.

Person A is not your spouse or dependent, and you and Person A are not related parties.

After the proposed sale you and Person A will hold the property as tenants in common with you holding an 80% ownership interest and Person A holding a 20% ownership interest.

You propose to move out of the property after the sale of the 20% ownership interest to Person A.

Person A proposes to move into the property after they acquire the 20% ownership interest and will treat the property as their main residence for taxation purposes.

Person A will pay you rent based on 80% of the market value rent for the property for the use and enjoyment of your 80% interest in the property.

You will continue to treat the property as your main residence after you move out of the property.

You do not have a spouse who will be claiming any other property as a main residence during your ownership interest of the property.

You envisage selling your remaining ownership interest in the property a few years after you complete the partial sale to Person A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-192

Reasons for decision

Question 1

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a capital gain or capital loss from a CGT asset that is a dwelling, or your ownership interest in it, to be disregarded if:

(a)         the taxpayer is an individual, and

(b)         the dwelling was the taxpayer's main residence throughout their ownership period, and

(c)         the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, a deceased estate.

The property consists of a house, which meets the definition of a dwelling in section 118-115 of the ITAA 1997.

Section 118-200 of the ITAA 1997 extends the main residence exemption available under section 118-110 to a dwellings adjacent land up to two hectares in area provided that the adjacent land was used primarily for private or domestic purposes in association with the dwelling.

As you have lived in the property as your main residence throughout your entire ownership period up until the time of your disposal of the 20% interest, you are eligible for the full main residence exemption on your disposal of the 20% interest in the dwelling and the adjacent 2 hectares of land.

Question 2

You intend to move out of the property after you sell a 20% interest in the property to Person A. You will continue to hold an 80% ownership interest in the property, as tenant in common, with Person A. Person A will pay you rent based on 80% of the market value rent for the property for the use and enjoyment of your 80% interest in the property. After you move out of the property you intend to choose to continue to treat the property as your main residence.

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a capital gain or capital loss from a CGT asset that is a dwelling, or your ownership interest in it, to be disregarded if:

(a)          the taxpayer is an individual, and

(b)          the dwelling was the taxpayer's main residence throughout their ownership period, and

(c)           the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, a deceased estate.

Taxation Ruling IT 2485 Income Tax: Capital Gains: Jointly owned property: Not the principal residence of all joint owners considered the application of the exclusion in the former section 160ZZQ of the Income Tax Assessment Act 1936 to a situation where a dwelling was jointly owned. In relation to the disposal of a dwelling that is jointly ownedby a taxpayer with another person to whom the taxpayer is not legally married, IT 2485 concluded that the exemption was available to each joint owner who occupied the dwelling as their principal residence in respect of his or her share in the dwelling.

In accordance with section 118-145 of the ITAA 1997, if a dwelling that was your main ceases to be your main residence, you may choose to continue to treat it as your main residence. Where you use that part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period you may choose to continue to treat that dwelling as your main residence is 6 years.

As the property is currently your main residence in accordance with section 118-110 of the ITAA 1997 and you intend to use it to produce assessable income, after you sell a 20% interest and move out of the property, you can make the absence choice under section 118-145 in relation to the property for a period of 6 years after you move out. As you and Person A are not each other's spouse, your eligibility to the full main residence exemption is not impacted by Person A's circumstances and choices under section 118-170 of the ITAA 1997.

Question 3

In accordance with section 118-190 of the ITAA 1997, 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)          apart from this section, because the dwelling was your main residence or someone else's during a period:

                             i.        you would not make a capital gain or capital loss from the event; or

                            ii.        you would make a lesser capital gain or loss than if Subdivision 118-B had not applied; and

(b)          the dwelling was used for the purpose of producing assessable income during all or a part of that period; and

(c)           if you had incurred interest on money borrowed to acquire the dwelling, or your ownership interest in it, you could have deducted some or all of that interest.

Where a main residence is used to produce income for the first time, there is a special rule under Subsection 118-192(1) of the ITAA 1997 that applies if:

(a)          you would get only a partial exemption under this Subdivision for a CGT event happening in relation to a dwelling or your ownership interest in it because the dwelling was used for the purpose of producing assessable income during your ownership period; and

(b)          that use occurred for the first time after 7:30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and

(c)           you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.

Where the special rule in section 118-192 applies, you are taken to have acquired the dwelling or your ownership interest at the income time for its market value at that time.

In your case, after you sell a 20% interest in the property to Person A, you intend to use the property to produce assessable income by renting your remaining 80% interest in the property to Person A. In these circumstances you satisfy the conditions for a partial main residence exemption under section 118-190 of the ITAA 1997. The special rule under section 118-192 would also apply so that you would be taken to have acquired your ownership interest in the dwelling at the time it was first used to produce assessable income.

However, these provisions will not apply if you choose to continue to treat the property as your main residence in accordance with the absence rule in section 118-145 of the ITAA 1997 and dispose of the dwelling within 6 years of you ceasing to occupy the property as your main residence.