Edited version of private advice

Authorisation Number: 1052366833323

Date of advice: 27 February 2025

Ruling

Subject: Main residence exemption - partial exemption

Question 1

Are you eligible for a partial main residence exemption for your interest in the dwelling under 118-190 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

On XX XXXX 20XX, you married Person A.

On XX XXXX 20XX, a common partnership of XX% each between the trust and Person A purchased the dwelling located at the property.

You and Person A are the trustees of the trust.

On XX XXXX 20XX, the dwelling became your and Person A's main residence.

The property size is greater than X hectares.

On XX XXXX 20XX, you and Person A separated.

On XX XXXX 20XX, you and Person A entered into a financial agreement (the agreement).

The agreement changed the ownership interests in the property to the following:

•                XX% to the trust

•                XX% to you

•                XX% to Person A

On XX XXXX 20XX, Person A transferred to you XX% ownership interest in the property.

For a period, you were temporarily assigned to a different location for employment.

During this period, you entered a lease agreement allowing them to use the property, including the dwelling, for their business. You made the choice to continue treating the dwelling as your main residence during your absence (the absence choice).

From XX XXXX 20XX to XX XXXX 20XX, you moved back into the dwelling. Person A and your children continued to live in the dwelling with you.

From XX XXXX 20XX, you rented out part of the dwelling adjacent to the area you used as your primary residence.

You, Person A, and your children occupied XX% of the floor plan as your main residence, and you used the remaining XX% for income producing purposes.

You utilised short-term accommodation platforms and made XX% of the floor space available for rent for a total of XX days out of a total of XX days.

On XX XXXX 20XX, you entered a contract to sell the property. The contract provided for a X-day settlement.

On XX XXXX 20XX, the property settled.

During your ownership period of the property, you did not own any other properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subdivision 118-B

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-178

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-192

Income Tax Assessment Act 1997 subdivision 126-A

Income Tax Assessment Act 1997 section 126-5

Income Tax Assessment Act 1997 section 126-25

Reasons for decision

Marriage breakdown

Under section 104-10 of the ITAA 1997, Capital Gains Tax (CGT) event A1 happens if you dispose of a CGT asset. Disposal of a CGT asset happens when a change of ownership occurs from one entity to another.

Generally, a CGT event will happen when there is a change of ownership of an asset acquired on or after

XX September 19XX. However, marriage or relationship breakdown rollover relief under subdivision 126-A of the ITAA 1997 is potentially available when CGT event A1 happens involving asset transfers between spouses or former spouses.

Under subdivision 126-A of the ITAA 1997 the rollover applies if your marriage or relationship ended on or after

XX September 19XX, and:

•                you transfer an asset or a share of an asset to your spouse

•                you receive an asset or a share of an asset from your spouse, or

•                a company or trustee of a trust transfers an asset to you or your spouse.

Under subsection 126-5(3A) of the ITAA 1997, there is no roll-over because of a financial binding agreement made under the Family Law Act 1975, unless the following conditions set out in section 126-25 are met:

•                the spouses are separated, and

•                there is no reasonable likelihood of cohabitation resuming, and

•                the transfer is for reasons directly connected with the breakdown of the marriage or relationship

Under subsection 118-130(1) of the ITAA 1997 the definition of ownership interest in a dwelling includes having a legal or equitable interest in it. Subsection 118-130(2) and 118-130(3) combined provides you have an ownership in a dwelling that you acquired under a contract from when you obtain legal ownership of it (purchase settlement) until your legal ownership ends (sale settlement).

'Ownership period' is defined in section 118-125 of the ITAA 1997 as the period on or after 20 September 1985 when you had an ownership interest in the dwelling.

Section 118-178 of the ITAA 1997 has the effect that where an ownership interest in a dwelling is acquired from a spouse that attracts the marriage or relationship roll-over, you are taken to have acquired that interest when your spouse acquired it. You are subject to capital gains tax on that interest until the time of transfer unless your spouse was eligible for the main residence exemption during that period.

Main residence

Section 118-110 of ITAA 1997 provides that a taxpayer can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is their main residence. To qualify for the full exemption, the dwelling must have been your main residence throughout your ownership period and must not have been used to produce assessable income.

Section 118-120 of ITAA 1997 provides that you can choose the area adjacent to the dwelling to apply the main residence exemption to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. Further, subsection 118-120(3) of the ITAA 1997 specifies that the total of the land (including the land on which the dwelling is situated) must not exceed 2 hectares.

Section 118-145 of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence (the absence choice).

If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence is X years.

If you used your property to produce income, under subsection 118-192(2) of the ITAA 1997, you are taken to have acquired your ownership interest in the dwelling at the date it was first used to produce income for its market value at that time.

Adjustment to the main residence exemption for income producing use

Section 118-190 of the ITAA 1997 is directed at reducing the main residence exemption and only allowing you a partial exemption if the dwelling is used for income producing purposes.

Paragraph 4 of Taxation Determination TD 1999/66 Income tax: capital gains: what factors should be taken into account in determining the 'amount that is reasonable' in applying subsection 118-190(2) of the Income Tax Assessment Act 1997? provides the general rule for apportioning the main residence exemption is to adjust based on floor area and the period of income-producing use.

Subsection 118-190(3) of the ITAA 1997 provides you ignore any use of the dwelling for the purpose of producing assessable income during any period that you have made the absence choice to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

Application to your circumstances.

On XX XXXX 20XX, you received your XX% ownership interest in the property from Person A in compliance with the agreement made under the Family Law Act 1975. The transfer satisfied the requirements of section 126-25 of the ITAA 1997.

Further, the transfer met the conditions for marriage breakdown rollover under section 126-5 of the ITAA 1997. Under subsection 118-178(2) of the ITAA 1997 your XX% ownership interest commenced when Person A's ownership interest commenced (the acquisition time). From the acquisition time until the time Person A's XX% ownership interest ended on XX XXXX 20XX, you are eligible for the main residence exemption as you both used the dwelling as your main residence and did not use it for income producing purposes.

You continued to live in the property until moving out for the period for the period, when you were temporarily assigned to location A for short-term employment. During this period, you entered a lease agreement allowing them to use your property, including the dwelling for their business. You made the absence choice to continue treating the property as your main residence.

As you made the absence choice under section 118-145 of the ITAA 1997 you can ignore any use of the property for the purpose of producing assessable income during your absence period.

Accordingly, you are eligible for the main residence exemption for the period of your ownership interest up until

XX XXXX 20XX. However, for the period after the absence period until sold, you moved back into the property and rented out part of the dwelling. As part of the property was used to produce income during the period XX XXXX 20XX to XX XXXX 20XX, you are entitled to a partial main exemption under section 118-190 of the ITAA 1997. You are taken to have acquired your ownership interest in the dwelling at the date it was first used to produce income for its market value at that time.

There will be an adjustment for the periods it was available to rent. The final adjustment is for your XX% share of the property.

Capital gain (CG) × adjustment for period available for rent × XX% floor space used for renting × XX% ownership interest equals net capital gain (NCG):

CG × Days available for rent ÷ Total days from XX XXXX 20XX to XX XXXX 20XX × 1 ÷ 4 × 1 × 4 = NCG

You are also entitled to the 50% CGT discount in relation to the property.