Edited version of private advice

Authorisation Number: 1052133732231

Date of advice: 12 July 2023

Ruling

Subject: CGT - main residence exemption

Question

Are you entitled to disregard in full any capital gain or capital loss you make on the disposal of the Property?

Answer

No. You cannot claim the full main residence exemption because part of the dwelling was used to derive assessable income during your ownership period.

Question 2

Are you entitled to a disregard in part any capital gain or capital loss you make on the disposal of the Property?

Answer

Yes. You are entitled to a partial main residence exemption under section 118-190 of the Income Tax Assessment Act 1997 (ITAA 1997) for the proportion of the Property that was not used to derive assessable income. You will nominate the Property as your main residence when you dispose of it and exercise the absence choice in the relevant income year return.

As the dwelling was used to derive assessable income at the time you vacated the Property, you therefore, cannot exercise the absence choice for your entire ownership period over the entire Property. The proportion of the Property that was used to produce income before you stopped living in it is the same proportion of the capital gain that is assessable.

As you owned the dwelling for more than 12 months, you can also apply the 50% CGT general discount.

This ruling applies for the following period

Year ending 30 June 2024.

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Some 10 years ago, you and your partner purchased the Property.

The Property is less than 2 hectares in size.

You are the sole registered owner of the Property.

The loan to finance the purchase of the Property was obtained solely in your name.

You do not hold an ownership interest in another property.

You and your partner moved into the property once it was acquired.

The Property contains 2 units of accommodation, the main house and the 'teenagers' retreat' which is above the garage. Both units are on one title, cannot be sold separately and constitute one dwelling.

Early on, the teenagers' retreat was leased for approximately 12 months and derived assessable income.

The Property has not been used to produce assessable income since the initial lease ended.

You and your partner separated. You vacated then the Property.

Your partner continued to reside at the Property.

Your partner was to refinance the loan and have the Property transferred into their name. This did not eventuate.

You have taken legal action to have the Property sold.

The Property is due to be sold shortly.

You choose to continue to treat the Property as your main residence from when you vacated it until the end of your ownership period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 subsection 118-185

Income Tax Assessment Act 1997 section 118-190

Reasons for decision

Full main residence exemption and absence rule

For CGT purposes, your home becomes your main residence from the time you acquire it, provided you move in as soon as practicable. If you buy your home, the 'time you acquire it' is the settlement date of the contract.

As a general rule, a dwelling is no longer your main residence once you stop living in it. However, under section 118-145 of the ITAA 1997, you may choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it. This choice needs to be made only for the income year that the CGT event happens to the dwelling, for example the year that you enter into a contract to sell it. However, if you make this choice, you cannot treat any other dwelling as your main residence while you apply this section.

You can disregard in full a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. This is called the main residence exemption. To qualify for the full main residence exemption, the dwelling must have been your main residence for the whole period you owned it and must not have been used to produce assessable income.

In your case, the Property became your main residence when you acquired it. However, you cannot claim the full main residence exemption because the 'teenagers' retreat', which was part of your home, was used to derive assessable income. You may choose to continue to treat the Property as your main residence even though you vacated the Property because you do not hold an ownership interest in any other property and the Property has not been used to derive assessable income for more than 6 years during your absence. However, you will only be able to do so for the proportion of the dwelling that was not being used to derive assessable income (See below).

Partial exemption

Under subsection 118-190(1)(b) of the ITAA 1997, your main residence exemption is reduced, and you only get a partial exemption if the dwelling was used for the purpose of producing assessable income during all or part of that period. Subsection 118-190(3) of the ITAA 1997, provides that you ignore any use of the dwelling for the purpose of producing assessable income during any period that you treat it as your main residence under section 118-145 to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

This means if you use any part of your home to produce income before you stop living in it, you can't apply the continuing main residence exemption to that proportion of the dwelling. So, you can't get the main residence exemption for that part of your home either before or after you stop living in it.

In your case, a proportion of your home (the teenagers' retreat) was used to derive assessable income just before you vacated it. Given this, under subsection 118-190(1) of the ITAA 1997, you are entitled to a partial main residence exemption for the proportion of your home that was not used to derive assessable income (the main house). Applying subsection 118-190(3) of the ITAA 1997 to your situation means the partial main residence exemption continues for your entire ownership period and not just for the 12 months when the teenagers' retreat was used to derive assessable income. You will still be entitled to the partial main residence exemption for the period when you did not live at the Property. As outlined above, this is because you do not hold an ownership interest in any other property and the Property was not used to derive assessable income after once you vacated the Property.

Calculation of the partial exemption

The proportion of your home, the teenagers' retreat, used to derive assessable income during the period before you stopped living in it will be the same proportion of the capital gain that is assessable.

You would calculate your capital gain or loss using the formula below:

Capital gain × % of dwelling used to produce income during the period before you stopped living in it.

An example on how to calculate a partial main residence exemption in a situation similar to your case is provided below and can be found by searching for 'QC 66030 ' on ato.gov.au.

Example: home used for income before ceasing to live in it

Helen bought a house in 2005 and moved in immediately:

•         She used 75% of the house as her main residence and the remaining 25% as a doctor's surgery.

•         In 2016, she moved out and rented out the house.

•         She sold the house in 2022, making a capital gain of $400,000.

Helen chooses to treat the house as her main residence for the 6 years it was rented out.

As 25% of the house was used to produce income during the period before Helen stopped living in it, the same proportion of the capital gain is assessable:

$400,000 × 25% = $100,000