Edited version of private advice

Authorisation Number: 1052204364407

Date of advice: 8 January 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Are you eligible for a partial main residence exemption on disposal of your original ownership interest?

Answer

Yes.

Question 2

Is the cost base of your original ownership interest the market value at the time you first used the Property for income producing purposes?

Answer

Yes.

Question 3

Are you eligible for a partial main residence exemption on disposal of your second ownership interest?

Answer

Yes.

Question 4

Is the first element of the cost base of your second ownership interest the market value at the time you acquired the interest?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

You and your ex-partner Person A purchased a property in 19XX.

You lived in the Property until part way through 20XX.

You separated from Person A in 20XX. At that time, they transferred their interest in the Property to you. You paid stamp duty on the transfer based on the market value of the Property at that time.

At the same time, you paid out an amount remaining on a loan for a property Person A owned in Country A. This agreement was informal.

You rented the Property out for a continuous period of more than six years.

You moved back into the property as the current tenants' lease had expired.

You undertook renovations to the Property.

In 20XX you rented the Property out for a continuous period of less than six years.

You moved back into the Property.

You disposed of the Property the following year.

Therefore at the point of sale you owned your original interest and your second interest that you acquired from Person A.

Assumptions

For the purpose of this ruling, it is assumed that:

•         You will choose to continue to treat the property as your main residence from when you moved out the first time for the maximum period allowable, and

•         You will choose to continue to treat the property as your main residence from when you moved out the second time until when you moved back in

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-192

Reasons for decision

Question 1

Summary

You are eligible for a partial main residence exemption on disposal of your original ownership interest.

Detailed reasoning

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event A1 happens if you dispose of a CGT asset.

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence if you meet the following conditions:

(a)   you are an individual; and

(b)   the dwelling was your main residence throughout your ownership period; and

(c)   the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of the estate of a deceased person

Section 118-145 of the ITAA 1997 provides that if a dwelling ceases to be your main residence, you may choose to continue to treat it as your main residence after you move out of the dwelling. This is sometimes referred to as the absence choice.

If you use the dwelling for the purpose of producing assessable income, the maximum period that you can treat it as your main residence is six years at a time.

Where a full main residence exemption is not available, you may be entitled to a partial main residence exemption.

Section 118-185 of the ITAA 1997 contains the formula for calculating a partial main residence exemption for a dwelling that was your main residence for only part of your ownership period.

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

Capital gain or capital loss amount × Non-main residence days ÷ Days in your ownership period

Application to your circumstances

You acquired your original ownership interest in 19XX. You resided at the Property in which you held the ownership interest from the time of acquisition for several years.

You moved out of the Property and used it to earn assessable income for a continuous period of more than six years. Once the period you have used the property to earn assessable income is greater than six years, the absence choice is no longer effective. As a result, you are not eligible for a full main residence exemption.

However, you are eligible for a partial main residence exemption on disposal of your original ownership interest

You have indicated you will exercise the absence choice on disposal. Therefore, you will need to include the days over the six-year period as non- main residence days when calculating any partial main residence exemption.

There will be an adjustment to the total period due to the answer to Question 2.

Question 2

Summary

The first element of the cost base of your original ownership interest will be the market value at the time you first used the Property for income producing purposes.

Detailed reasoning

Section 118-192 of the ITAA 1997 contains a special rule, known as the first time to produce income rule.

This rule will apply if the following requirements are met:

•         you would only get a partial exemption under Subdivision 118-B 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

•         that use occurred for the first time after 7.30pm on 20 August 1996; and

•         you would have got a full exemption under Subdivision 118-B of the ITAA 1997 if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.

If all of the above conditions are met, you are taken to have acquired the dwelling or your ownership interest in the dwelling at the income time for its market value at that time.

Application to your circumstances

The special rule in section 118-192 of the ITAA 1997 is applicable to your original ownership interest. Just before the time the Property was first used to earn assessable income, you would have been entitled to a full -main residence exemption on disposal.

Therefore, the cost base for your original ownership interest will be the market value of your interest at the time the Property was first used for income producing purposes.

The first income time will become the new acquisition date and adjust the partial main residence exemption calculation.

Question 3

Summary

You are eligible for a partial main residence exemption on disposal of your second ownership interest.

Detailed reasoning

Our response above outlines the conditions for a full and partial main residence exemption. The primary condition for the full exemption is that the dwelling was your main residence for the whole of your ownership period. The primary condition for the partial exemption is that the dwelling was your main residence for some of your ownership period.

Application to your circumstances

When you acquired your second ownership interest, the Property was being used to earn assessable income. You subsequently moved back into the Property and then used it to earn assessable income for a continuous period of less than six years.

You have indicated you will exercise the absence choice from the time you moved out of the Property until you moved back in.

The main residence exemption period cannot start until you move back into the Property and re-establish it as your main residence. Therefore the period from when you acquired your second ownership interest until you moved back into the Property will not be exempt for the purposes of the main residence exemption.

As you are not eligible for a full main residence exemption, you will be eligible for a partial main residence exemption on disposal of your ownership interest.

Question 4

Summary

The first element of the cost base of your second ownership interest will be the market value of the interest at the time you acquired the interest.

Detailed reasoning

Subsection 112-20 (1) of the ITAA 1997 provides that the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if:

(a)  You did not incur expenditure to acquire it, except where your acquisition resulted from:

(i)CGT event D1 happening; or

(ii)Another entity doing something that did not constitute a CGT event happening; or

(b)  Some or all of the expenditure you incurred to acquire it cannot be valued; or

(c)   You did not deal at arm's length with the other entity in connection with the acquisition

Parties are not at arm's length where they are related or associated in some way so that while each party may enter a transaction with some self interest in mind, it may also take into consideration the interests of the other party in making the agreement.

Examples of such relationships are transactions between family members and related corporations.

Application to your circumstances

Your second ownership interest was transferred to you by Person A. At the time of transfer, you paid out the remaining amount they owed on a property in Country A.

Although you incurred expenditure to pay out the remaining amount of Person A's loan, you were not dealing with each other at arm's length.

Therefore, the first element of the cost base of your second ownership interest will be the market value of the interest at the time you acquired the interest.