Edited version of private advice

Authorisation Number: 5010082457567

Date of advice: 23 June 2022

Ruling

Subject: CGT - main residence exemption

Question 1

Is the Taxpayer eligible to choose to continue to treat the dwelling at Property 1 as their main residence subsequent to their ceasing to reside at the property on 1 June 2002 for a period of six years pursuant to section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20bb

The scheme commences on

1 July 20aa

Relevant facts and circumstances

1.         In 20aa, the Taxpayer resided at a property they did not own but rented.

2.         On XX June 20aa, the Taxpayer executed a contract to purchase the Property 1. Upon settlement of the Property on XX September 20aa, the Taxpayer did not move into it as it was subject to a pre-existing lease which was executed by the vendors and ended in January 20bb. Consequently, the Taxpayer continued to reside in their pre-existing rental residence.

3.         On XX January 20bb, the rental property was sold by its owners. On XX January 20bb, the Taxpayer moved to and resided in Property 1. They moved their furniture and personal effects to the residence and also transferred the utilities to their names. The Property became the Taxpayer's main residence at this point in time and they resided at the property for approximately five months.

4.         On XX March 20xx, the Taxpayer purchased Property 2. On XX June 20xx, the Taxpayer moved into Property 2 and leased Property 1 to tenants.

5.         On XX February 20cc (more than 6 years after XX March 20xx), the Taxpayers recommenced residing at the Property 1 with a small temporary break in their residency. Since that time, the Property was their main residence.

Sale of Property 1:

6.         On XX November 20aa, the Taxpayer entered into a contract for the sale of Property 1.

REASONS FOR DECISION

CAPITAL GAINS TAX (CGT):

7.         Section 102-20 of the ITAA 1997[1] provides that a taxpayer may make a capital gain or loss when a capital gains tax (CGT) event occurs to a CGT asset. Subsection 108-5(1) defines a CGT asset as any kind of property or a legal or equitable right that is not property.

8.         Section 108-7 provides that where a CGT asset is owned by individuals as joint tenants they are treated as if they each owned a separate CGT asset in the same proportion as if each of them held that interest as a tenant in common.

CGT events:

9.         Section 104-5 sets out a list of CGT events. Where more than one CGT event[2] can occur in relation to a transaction, the CGT event which is the more specific CGT event is the applicable one.

CGT event A1 - disposal of a CGT asset:

10.      CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1). Subsection 104-10(2) states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity.[3]

11.      Paragraph 104-10(3)(a) of the provides that the timing of the CGT event will be when the contract to dispose of the asset is entered into by the taxpayer. Paragraph 104-10(3)(b) explains that if there is no contract, the time of disposal will be when the change of ownership occurred.

a.         Subsection 104-10(5) provides that a capital gain or loss made under CGT A1 will be disregarded for CGT assets acquired before 20 September 1985.

Main Residence exemption:

12.      Broadly, Subdivision 118-B allows taxpayers to ignore a capital gain or loss made from a CGT event that occurs with regards to a dwelling that is their main residence (main residence exemption).

13.      The basic rules that must be satisfied in order for a taxpayer to be eligible for the main residence exemption are provided in section 118-110. Specifically, subsection 118-110(1) provides that a capital gain or loss from a CGT event in relation to a taxpayer's main dwelling, or ownership interest in it, is disregarded if:

a.         the taxpayer is an individual

b.         the dwelling was the individual's main residence throughout the ownership period, and

c.         the interest did not pass to the individual as a beneficiary in, and was not acquired as a trustee of, a deceased estate.

14.      Subsection 118-110(2) further explains that the main residence exemption is only available in relation to CGT events A1, B1, C1, C2, E1, E2, F2, K3, K4 and K6.

15.      The meaning of the term 'dwelling' is defined in subsection 118-115 as a unit of accommodation that is a building and consists of wholly or mainly of residential accommodation.

16.      The meaning of the term 'ownership interest' in land or a dwelling is defined in subsection 118-130(1) as:

a.         for land - if an entity has a legal or equitable interest in it or a right to occupy it

b.         for a dwelling that is not a flat or home unit - if an entity has a legal or equitable interest in the land on which it is erected, and

c.         for a flat or home unit - if an entity has a legal or equitable interest in a stratum unit in it or a licence or right to occupy it.[4]

17.      Subsection 118-130(2) further explains that where land or a dwelling is acquired under a contract, a taxpayer will acquire an ownership interest in it from:

a.         the time the taxpayer obtains legal ownership, or

b.         if the contract, or related contract, gives the taxpayer a right to occupy the asset at an earlier time, then the earlier time.

18.      Where a taxpayer has a contract for a CGT event happening to land or dwelling, subsection 118-30(3) provides that their ownership interest continues until their legal ownership of the land or dwelling ends.

Absences from the main residence - "Absence" rule:

19.      Section 118-145 provides that if a dwelling that was a taxpayer's main residence and ceases to be so, the taxpayer may choose to treat that dwelling as their main residence. Where part of the dwelling was used to produce assessable income, subsection 118-145(2) provides that the maximum period of time that the dwelling can be treated as the taxpayer's main residence is 6 years while the dwelling is used to produce assessable income.

a.         If the dwelling is not used for an assessable income producing purpose, subsection 118-145(3) provides that it can be treated as a main residence indefinitely.

20.      Subsection 118-145(4) further provides that if a taxpayer makes the choice to continue to treat a dwelling as their main residence after it was their main residence, they cannot treat another dwelling as their main residence.[5]

Making the choice:

21.      Section 103-25 provides that a taxpayer making a choice in Part 3-1 or 3-3 must be made:

a.         by the day that they lodge their income tax return for the year in which the relevant CGT event occurred, or

b.         within additional time as provided by the Commissioner.

Application to your circumstances:

22.      On 26 June 20aa, the Taxpayer purchased, and obtained ownership interest in, Property 1. As the Property is a house, it satisfies the definition of the term "dwelling" in subsection 118-115. The legal ownership in the dwelling was obtained on the settlement date of 28 September 20aa per subsection 118-130(2).

23.      The Taxpayer sold Property 1 on 1 November 20aa for a disclosed amount. The sale of the Property is the disposal of a CGT asset and is a CGT event A1, pursuant to subsection 104-10(1). The legal ownership in the dwelling ends on the settlement date for that disposal per subsection 118-130(3).

24.      In order to determine whether the Taxpayer is eligible to ignore the capital gain associated with the sale of Property 1, it is necessary to establish that they satisfy the applicable provisions of Subdivision 118-B.

25.      Relevantly, on or around, on 15 January 20bb, the Taxpayer moved to and resided in Property 1. They moved their furniture and personal effects to the residence and also transferred the utilities to their names. The Property 1 became the Taxpayer's main residence at this point in time and they resided at the property for approximately five months. Pursuant to section 118-135, the Property became the Taxpayer's main residence at the time they commenced residing in it, being 15 January 20bb.

26.      The Taxpayer did not continually reside at Property 1 during all of the period which they held their ownership interest in it. They moved out of for approximately 7 years.

27.      During the time of Taxpayer's absence from the Property 1, the Property was rented out to tenants and produced assessable income. As the Property was used to generate assessable income, subsection 118-145(2) will apply to restrict the period of time that the Taxpayer can treat it as their main residence. Specifically, the maximum amount of time the Taxpayer can treat Property 1 is six years after they ceased residing in it. As the Taxpayer did not treat any other property as their main residence during this time, subsection 118-145(4) is also satisfied. Consequently, the Taxpayer is eligible to choose to treat Property 1 as their main residence for a six year period after they ceased living in it. This choice must be made by the day the Taxpayers lodge their income tax returns for the year ended 30 June 20bb, in accordance with section 103-25.

Other relevant comments

28.      Where a dwelling is used to produce assessable income for longer than the six year period during the ownership period such that it is treated as a taxpayer's main residence for part of the ownership period, only a partial exemption for the CGT event is available. The formula for calculating the amount of the partial exemption is provided in subsection 118-185(2). The ownership period for the formula is the number of days from settlement date of acquisition to disposal, that is, the dates for when legal ownership commences and ends per subsections 118-130(2) and (3). Additionally, in such cases, the taxpayer is taken to have acquired the dwelling at the time it was first used to produce assessable income, as provided in section 118-92. In this case, the ownership interest commences on 28 September 2001 and was first used to produce income also on 28 September 2001. Search for QC 66029 Moving to a new main residence and QC 66033 Using your home for rental or business on ato.gov.au for information regarding a partial exemption for the CGT event and calculating a capital gain amount.

[1] All future references to the legislation are to the Income Tax Assessment Act 1997, unless otherwise stated.

[2] Except for CGT events D1 and H2.

[3] However, subsection 104-10(2) of the ITAA 1997 also provides that a change in ownership will not occur is the taxpayer ceases to be the legal owner of the asset but continues to be its beneficial owner.

[4] Subparagraph 118-130(1)(c)(iii) defines ownership interest where a company owns the legal or equitable interest, which is not relevant in the current case.

[5] Except if section 118-140 applies (which is not relevant to the current case).