Edited version of private advice

Authorisation Number: 1052377567907

Date of advice: 27 March 2025

Ruling

Subject: Capital gains tax

Question 1

Are you entitled to a full main residence exemption from CGT upon disposal of Property A?

Answer 1

No.

Question 2

Are you entitled to a partial main residence exemption from CGT upon disposal of Property A?

Answer 2

Yes.

Question 3

Are you entitled to make an absence choice upon disposal of Property A?

Answer 3

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased Property A.

Property A was rented out soon after for more than X years.

Property A ceased being a rental and you resided there.

You vacated property A.

You purchased Property B and began residing there.

Property A was unoccupied.

You moved back into Property A and will continue to reside there indefinitely.

Property B was sold.

You want to make property A your main residence for CGT purposes.

You want to pay the CGT on the disposal of property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

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 118-145

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-192(1)

Reasons for decision

Summary

You are entitled to treat Property A as your main residence and use the absence choice for the period of absence, under section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Capital gains tax

All assets you've acquired since capital gains tax (CGT) started (on 20 September 1985) are subject to capital gains tax unless specifically excluded.

A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else.

A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

Your net capital gain is the total of your capital gains for the income year, reduced by any capital losses that you have made.

Question 1

Main residence exemption

Generally, you disregard a capital gain made on the disposal of a dwelling that is your main residence if the dwelling was your home for the whole period you owned it, the dwelling was not used to produce assessable income, and any land on which the dwelling is situated is not more than 2 hectares.

Section 118-145 of the ITAA 1997 provides the absences rule 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.

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 under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

However, as property A was used to earn assessable income for a continuous period of more than 6 years from 1996 to 2005 it will not be fully exempt under main residence exemption. You will not be eligible for a full main residence exemption on the disposal of property A.

Question 2

Home first used to produce income

Section 118-192 of the Income Tax Assessment Act 1997 outlines the Special rule for first use 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

Days in your ownership period

To obtain a partial main residence exemption, you must have initially established the dwelling as your main residence. Where the dwelling is used to produce assessable income, you can nominate the dwelling as your main residence for up to six years before your full exemption is reduced under section 118-145 of the ITAA 1997. The six-year period will start again if you move back into the dwelling and re-establish it as your main residence, before using it for another period of income production.

As the dwelling was not your main residence for the entire period of your ownership, you are eligible for a partial main residence exemption on disposal of the dwelling under subdivision 118-B.

Question 3

Absence choice

Section 118-145 of the ITAA 1997 provides that once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence during periods of absence. When the dwelling is left vacant, you may continue to treat the dwelling as your main residence for an indefinite period. When you choose to do this, you are making an absence choice.

The main residence provisions are extended to cover those taxpayers who leave their main residence but choose to continue to treat it as their main residence even if it is rented out, provided certain conditions are met.

If a dwelling ceases to be a taxpayer's main residence, and they use the dwelling to produce assessable income, they can choose to treat the dwelling as their main residence for up to six years after they ceased living in it.

If you do not use it to produce income (for example, you leave it vacant or use it as a holiday home) you can treat the dwelling as your main residence for an unlimited period after you stop living in it. This is known as an absence choice.

This choice can be made each time a taxpayer moves out of their main residence and commences renting out the dwelling. If you make this choice, you cannot treat any other dwelling as your main residence for that period.

If the full exemption applies your capital gain or loss is disregarded - you don't pay tax on any capital gain, but nor can you use any capital loss to reduce your assessable income.

Alternatively, you may be entitled to a partial exemption.

Application to your situation

In your case, a CGT event occurred when you sold the dwelling at property B.

As property A has not been your main residence for the whole of your ownership period and was used to produce income greater than X years, you will only be entitled to a partial main residence exemption which will be calculated using the formula provided above upon disposal of the property.

However, as property A was not used to produce income for the period you lived at property B from 20XX to 20XX, you can treat property A as your main residence during this period using the absence choice. In making this choice, you are opting to pay the capital gains tax on the disposal of property B.