Edited version of private advice

Authorisation Number: 1052098679960

Date of advice: 17 March 2023

Ruling

Subject: CGT - main residence exemption

Question

Can the Taxpayers disregard the capital gain they made on the disposal of the Property pursuant to section 118-110 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

The Taxpayers purchased the Property for $XXX on XX XXX 20XX as joint tenants. Settlement for the purchase of the Property occurred on XX XXX 20XX.

The Taxpayers sold the Property on XX XXX 20XX for $XXX. Settlement for the sale of the Property occurred on XX XXX 20XX.

The Taxpayers occupied the Property and used it as their principal place of residence from XX XXX 20XX until XX XXX 20XX.

The Taxpayers did not use the Property, or any part of it, for the purpose of producing assessable income.

The Taxpayers were not a foreign resident at the time they sold the Property.

Relevant legislative provisions

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 subsection 104-10(4)

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

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 subsection 118-110(4)

Income Tax Assessment Act 1997 subsection 118-110(5)

Income Tax Assessment Act 1997 subsection 118-115(1)

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 subsection 118-130(2)

Income Tax Assessment Act 1997 subsection 118-130(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Net capital gains are included as assessable income under section 102-5. Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens.

The most common CGT event, CGT event A1, occurs when you dispose of a CGT asset, i.e. where a change of beneficial ownership occurs from you to another entity (section 104-10). The capital gain or capital loss is made at the time of the event.

Subsection 108-5(1) provides that any kind of property is a CGT asset.

Main residence exemption

Section 118-110 provides that a capital gain or capital loss made from a CGT event relating to a CGT asset that is a dwelling, or an ownership interest in it, is disregarded if certain conditions are satisfied.

The conditions which must be satisfied for the exemption to apply to you are:

      i.        you are an individual;

     ii.        the dwelling was your main residence throughout your ownership period;

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

   iv.        the capital gain or loss arises out of one of the specified CGT events, including CGT event A1; and

     v.        at the time the CGT event happens, you are not an 'excluded foreign resident' as defined in subsection 118-110(4) and you are not a foreign resident who doesn't satisfy the 'life events test' pursuant to subsection 118-110(5).

Subsection 118-115(1) defines a dwelling to include a unit of accommodation that is a building and consists wholly or mainly of residential accommodation, and any land immediately under the unit of accommodation.

Individuals who own a dwelling as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the dwelling and as if each of them held that interest as a tenant in common (section 108-7).

'Ownership period' is defined in section 118-125 as the period on or after 20 September 1985 when you had an ownership interest in the dwelling (or land on which the dwelling is later built).

In the context of a dwelling that is not a flat, you have an ownership interest if you have a legal or equitable interest in the land on which it is erected (paragraph 118-130(1)(b)).

In accordance with subsections 118-130(2) and (3), an individual has an ownership interest in a dwelling that they acquire under a contract from the time when they obtain legal ownership of it (unless they have a right to occupy the dwelling at an earlier time) and, where the dwelling is disposed of under a contract, the ownership interest ends when their legal ownership of it ends.

Application to your circumstances

The Taxpayers made a capital gain under subsection 104-10(4) (from CGT event A1) upon entry into a contract for the disposal of the Property (on XX XXX 20XX).

The capital gain made by the Taxpayers is disregarded on the basis that:

•         the Property is a dwelling for the purposes of Subdivision 118-B in which each Taxpayer has an ownership interest;

•         the Taxpayers are individuals;

•         the Property was the main residence of the Taxpayers throughout their ownership period (i.e. from the time they obtained legal ownership of the Property, on XX XXX 20XX, until their legal ownership of the Property ended, on XX XXX 20XX);

•         the ownership interest of the Taxpayers in the Property did not pass to them as a beneficiary in the estate of a deceased person, nor did they acquire it as the trustee of the estate of a deceased person; and

•         at the time the CGT event A1 happens, the Taxpayers were not a foreign resident (and therefore were neither an excluded foreign resident or a foreign resident who doesn't satisfy the life events test).