Edited version of private advice

Authorisation Number: 1052340309437

Date of advice: 12 December 2024

Ruling

Subject: CGT - main residence exemption

Question:

Are you entitled to a partial main residence exemption in relation to the sale of the Property under section 118-185 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property (the Property), with settlement occurring on Date 1.

You were living with your parents at their property when the Property was purchased.

The Property was rented out for some years after settlement on its purchase until you moved into the Property on Date 2.

During the following year you entered a contract to purchase another property (Property X), with settlement on its purchase occurring on Date 3.

You moved out of the Property on Date 4, moving into Property X the following day on Date 5.

The Property remained vacant from Date 5 until settlement on the sale of the Property occurred on Date 6.

You made an absence choice under section 118-145 of the ITAA 1997 from the day after you moved out of the Property, on and from Date 5 up to and including Date 6 when settlement on the sale of the Property occurred.

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 118-140

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Capital gains tax main residence exemption

Section 104-10 of the 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 a full main residence exemption enables any capital gain or capital loss made from a CGT event that happens to a dwelling to be disregarded when 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.

Your ownership period in a dwelling for main residence exemption purposes is from the date settlement of the contract of purchase of the dwelling occurs until the date settlement on the sale of the dwelling occurs under section 118-130 of the ITAA 1997.

The main residence exemption may be extended when either/both of the following occurs:

Absences from the main residence

If a dwelling that was a taxpayer's main residence stops being their main residence, the taxpayer may choose to continue to treat it as a main residence under section 118-145 of the ITAA 1997, known as the absence choice.

This choice can only be made once a dwelling becomes the taxpayer's residence and is not available for any period where the dwelling was rented prior to the taxpayer moving into it.

The absence choice can be made for an indefinite period if the dwelling is not used for income-producing purposes while the taxpayer is absent, such as it is left vacant. A choice can be made when the period covered by the absence choice is stopped.

The choice needs to be made in the income year that the CGT event occurs to the dwelling, such as the income year in which the sale of a property occurs.

Once the absence choice has been made in relation to a dwelling, no other dwelling can be treated as your main residence for the period covered by the absence choice except for a limited time if you are changing main residences.

Changing main residences

If a taxpayer acquires a dwelling that is to become the taxpayer's main residence and the taxpayer still owns an existing main residence, both dwellings are treated as the taxpayer's main residence for up to six months under subsection 118-140(2) of the ITAA 1997 when the following conditions are met:

a)            The taxpayer's existing main residence was the taxpayer's main residence for a continuous period of at least three months in the 12 months before it was disposed of; and

b)            The taxpayer's existing main residence was not used for income-producing purposes in any part of that 12-month period when it was not the taxpayer's main residence.

The changing main residences legislation applies automatically and does not require the taxpayer to choose to apply it.

The exemption for both dwellings does not apply indefinitely. Subsection 118-140(1) of the ITAA 1997 outlines that the exemption for both dwellings will only apply for the shorter of:

a)            six months (ending when the ownership interest in the existing main residence ends); or

b)            the period between the acquisition of the new dwelling and the disposal of the old dwelling.

Therefore, where a taxpayer acquires their new dwelling more than six months before the time of disposal of the old dwelling, both dwellings will qualify as the taxpayer's main residence for only the period of six months ending at the time of disposal of the old dwelling, being the six-month period prior to the settlement on the disposal of the old dwelling occurring.

The concession under section 118-140 of the ITAA 1997 applies to both properties even if the taxpayer has made an absence choice under section 118-145 of the ITAA 1997 that only one of the dwellings is to be treated as a main residence when the legal ownership ends, such as upon settlement under section 118-130 of the ITAA 1997.

Partial main residence exemption

You are only eligible for a partial main residence exemption when a CGT event happens in relation to a dwelling, or your ownership interest in it, under subsection 118-185(2) if the ITAA 1997 if:

a)            you are an individual; and

b)            the dwelling was your main residence for part of 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.

The full exemption is proportionately reduced by reference to the period for which the dwelling was not the taxpayer's main residence, being the non-main residence days.

Subsection 118-185(2) of the ITAA 1997 contains the following formula for calculating a partial main residence exemption for a dwelling that was your main residence for only part of your ownership period:

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

where:

Capital gain or capital lossis the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

Non-main residence daysis the number of days in your ownership period when the dwelling was not your main residence.

Application to your situation

Your ownership period of the Property for the CGT main residence exemption purposes commenced on Date 1 when settlement on its purchase occurred and ended on the date settlement on its sale occurred, being Date 6.

The main residence exemption will apply in your situation as follows:

•                     The Property was rented out after settlement on its purchase occurred on Date 1 until you moved into it on Date 2, being a period of several years. As you had not established the Property as your main residence as soon as practicable after you purchased it and/or prior to renting it out, the non-main residence days will be from Date 1 up to and including the day prior to Date 2 when you moved into the Property.

•                     You moved into the Property on Date 2 where you continued to live until Date 4. The Property was your main residence during this period and your main residence days will be on and from Date 2 up to and including Date 4.

•                     You made the absence choice from when you moved out of the Property until settlement on the Property's sale occurred on Date 6. As you made the absence choice the main residence exemption is extended and your main residence days will include the days starting from the day after you moved out of the Property, being Date 5, up to and including Date 6 which is a period of some months. Except for the period covered by section 118-140 of the ITAA 1997 (as discussed below), only the Property can be viewed as your main residence from Date 5 to Date 6; and

•                     Section 118-140 of the ITAA 1997 will automatically apply to both the Property and the Property X. The shorter period in accordance with subsection 118-140(1) of the ITAA 1997 will be six months from the end of your ownership in the Property. The six-month period that applies for the Property and the Woodcroft Property will be on and from the settlement date on the sale of the Property on Date 6 to the date six months earlier, being Date 7.

The absence choice had also been made for the same six-month period which only applies to the Property. However, both properties are covered under section 118-140 of the ITAA 1997 despite the absence choice being made for the period Date 7 to Date 6 with days in that period being main residence days for both properties.

As outlined above, you do not meet the conditions to be eligible for a full main residence exemption as there are non-main residence days during your ownership period of the Property.

Therefore, as the Property was not your main residence during all your ownership period you are only entitled to a partial main residence exemption under section 118-185 of the ITAA 1997. Accordingly, you can only partially disregard any capital gain made on the disposal of the Property.

Note: Any capital gain made on the disposal of the Property can be reduced by the 50% CGT discount when the conditions contained in Division 115 of the ITAA 1997 are met.

Note: As outlined above, the main residence exemption will not apply to two properties unless the concession contained in section 118-140 of the ITAA 1997 applies. Section 118-140 of the ITAA 1997 will automatically apply to Property X for the six-month period prior to settlement occurring on the sale of the Property, being from Date 7 to Date 6.

The absence choice has been made in relation to the Property on and from Date 5 until settlement on its sale occurred on Date 6. Therefore, you cannot have two main residences for the same period with the exception of the six-month period under section 118-140 of the ITAA 1997. Any excess days over the six-month period will not be covered under section 118-140 of the ITAA 1997.

Therefore, there will be no main residence days for Property X for a period of several months from settlement on its purchase on and from Date 3 up to an including the day prior to Date 7 as this period is excess over the six-month period covered under section 118-140 of the ITAA 1997, and the absence choice has been made in relation to the Property for that period.

Accordingly, you will only be entitled to a partial main residence exemption for Property X when a CGT event happens to it as you have non-main residence days in your ownership period of that property.