Edited version of private advice

Authorisation Number: 1052129414131

Date of advice: 21 June 2023

Ruling

Subject: CGT - main residence - absence choice

Question 1

Is any capital gain or capital loss you make due to the sale of the property disregarded in full?

Answer

No.

Question 2

Is any capital gain or capital loss you make due to the sale of the property disregarded in part?

Answer

Yes.

This private ruling applies for the following period

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts

You acquired in 20xx a dwelling.

You moved into the dwelling as soon as practicable.

You subsequently vacated the dwelling and the dwelling was tenanted.

COVID-19 and the State Government restrictions later prevented you from reoccupying the dwelling. You were also prevented from removing existing tenants, notwithstanding that their existing lease had expired.

You were also prevented from travelling to the dwelling due to Government restrictions.

The existing tenants vacated the dwelling more than 6 years after it was first used to produce income.

You moved into the dwelling very soon after the tenants vacated it.

You moved out of the dwelling several months later.

You will make an absence choice in relation to the dwelling.

You will sell the dwelling during the period covered by this private binding ruling.

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 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Subsection 118-145(2)

Detailed reasoning

Main residence exemption

Capital gains tax (CGT) is the tax you pay on any capital gain that you make. A capital gain or capital loss is made as a result of a CGT event occurring. The sale of a dwelling is CGT event A1.

Generally, if you are an individual you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence.

Main residence exemption absence rule

Section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if you leave your dwelling, such that it is no longer your main residence, you may choose to continue to treat it as your main residence, even if you have rented it out, provided certain criteria are met.

Subsection 118-145(2) ITAA 1997 provides that if a dwelling ceases to be your main residence and you use the dwelling to produce assessable income, the maximum period that you can treat it as your main residence is 6 years.

Home first used to produce income

If you start using your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss.

In this case, you are taken to have acquired your home at its market value at the time it is first used to produce income if all of the following apply:

•         you acquired your dwelling on or after 20 September 1985;

•         you first used the dwelling to produce income after 20 August 1996;

•         when a CGT event occurs, you would only obtain a part exemption because your dwelling was used to produce assessable income during the period you owned it; and

•         you would be entitled to a full exemption if the CGT event happened to your dwelling immediately before you first used it to produce income.

Partial main residence exemption

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you will only be eligible for a partial exemption on the disposal of the dwelling.

In that situation, the capital gain is calculated using the following formula:

Capital gain × Non-main residence days ÷ Total number of days in your ownership period

Conclusion

In your case, you acquired a dwelling in 20xx and you lived there for a number of years. The dwelling was then used to produce assessable income.

The absence choice period commenced when the dwelling was first rented out and could continue for up to six years while the dwelling was being used to produce assessable income. You were unable to re-establish the dwelling as your main residence due to Covid-19 travel restrictions and Government legislation preventing tenants being evicted.

You will dispose of the dwelling during the period covered by this ruling. As the period of time you lived in the dwelling and the period covered by the absence choice will not encompass all of your ownership period, the capital gain made on the disposal of the dwelling will be subject to CGT, i.e. you will only be entitled to a partial exemption.

While we acknowledge and appreciate your particular circumstances the Commissioner has no discretion to extend the period beyond 6 years where the dwelling has been used to produce income.

The first used to produce income rule will be applied first and then the partial exemption.

In your case, the following will be used when calculating the capital gain you have made on the disposal of your dwelling:

•         You are taken to have acquired your dwelling and the adjacent 2 hectares of land at its market value at the time it was first used to produce income. This will be the first element of the cost base of your dwelling when calculating the capital gain;

•         Your non-main residence days will be from the date the period covered by the absence choice ends, 6 years after it was first used to produce income, until you moved back into the dwelling.

•         Your total number of days in your ownership period is from the date the dwelling was first rented out until the settlement date when the dwelling is disposed.

CGT discount

As you are an individual and have held the CGT asset (house and land) for more than twelve months, you will be able to apply a 50% discount to the capital gain made on disposal.