Edited version of private advice

Authorisation Number: 1052127264806

Date of advice: 10 July 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Are you entitled to claim the full capital gains tax (CGT) main residence exemption (MRE) on sale of your property?

Answer

No.

Question 2

Are you entitled to claim a partial CGT MRE on sale of your property?

Answer

Yes.

This private ruling applies for the following period:

Year ended XX June 20XX

The scheme commenced on:

X July 20XX

Relevant facts and circumstances

In August 19XX you purchased the property in State A with the intention of living there and making it your main residence after your retirement.

When you purchased the property, it required alterations and improvements to make it liveable.

During your holidays between 19XX and 20XX, you visited the property and undertook renovations, construction, and necessary alterations to ensure that the property would be ready for your retirement.

Prior to retiring, you lived in State B.

In 20XX you retired and relocated from State B to State A.

You began living in the property and made it your main residence.

The dwelling was never used to produce assessable income.

The dwelling is situated on land that does not exceed two hectares.

You are residents of Australia for tax purposes.

In 20XX, due to the extensive management required of the property, you decided to sell it, which you did in November 20XX.

You have purchased an apartment unit nearby, where you now permanently reside.

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 118-185

Reasons for decision

Summary

The period from the date you purchased the property until you moved into it in July 20XX, is subject to CGT.

You are entitled to the main residence exemption for the period from July 20XX when you moved into it and made it your main residence until you sold it.

Detailed reasoning

Capital Gains Tax

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

Your main residence (your home) is exempt from CGT if you are an Australian resident and the dwelling:

• has been the home of you, your partner and other dependants for the whole period you have owned it
• has not been used to produce income
• is on land of 2 hectares or less.

If you meet these conditions, you do not pay tax on any capital gain when you sell your home and you ignore any capital loss.

What is a main residence?

Generally, a dwelling is considered to be your main residence if:

• you and your family live in it
• your personal belongings are in it
• it is the address your mail is delivered to
• it is your address on the electoral roll
• services such as gas and power are connected.

The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant.

Moving into a dwelling

Section 118-135 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if a dwelling becomes your main residence by the time it was first practicable for you to move into it after you acquired your ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence.

If you do not move into the dwelling as soon as practicable after you acquire your ownership interest then the dwelling will be treated as your main residence from the time you actually moved into it.

Main residence for part of ownership period

Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any capital loss or gain arising from a CGT event that occurs in relation to that dwelling.

A partial main residence exemption is available in respect of a dwelling if it was your main residence for only part of the ownership period. The following formula is used to calculate a partial main residence exemption:

Capital gain or capital loss amount × Non-main residence days ÷ Total days

* Non-main residence days are the days that the dwelling was not the taxpayer's main residence. For example, this will include the period from the acquisition date until the date they moved into the dwelling and commenced treating it as their main residence.

** The total days of ownership period is from the acquisition date until the disposal date of the property.

Application to your situation

In your case, the Commissioner is not satisfied that the property was your main residence for the whole of your ownership period, for the following reasons:

• you purchased it in August 19XX with the intention of retiring there
• when purchase, it was not liveable for your retirement life
• during your holidays, between 19XX and 20XX, you visited the property in State A and undertook renovations, construction, and necessary alterations to ensure that the property would be ready for your retirement
• you lived in State B until 20XX
• in 20XX you retired and relocated from State B to State A
• in July 20XX you began living in the property in State A and made it your main residence
• you occupied it until you sold it in November 20XX.

As the property was not your main residence for all of the ownership period you cannot disregard any capital gain or loss when you disposed of it. You are only entitled to partial main residence exemption.

Accordingly, you can treat the property as your main residence for that part of your ownership period from when you moved into it and made it your main residence until the settlement date when you sold it.

The period from the date you purchased the property in 19XX until you moved into it in July 20XX, is subject to CGT.

Because you held your ownership interest in the property for more than 12 months you are able to discount your capital gain using the 50% discount method after applying any capital losses (including losses from earlier years).