Private ruling: Capital gains tax - main residence exemption
Published: January 2015
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a full main residence exemption on the sale of the property? | A1: No | Q2: Are you entitled to a partial main residence exemption on the sale of the property? | A2: Yes

Relevant facts and circumstances: You purchased a residential property (the property). At the time of purchase, the property was being rented. You continued to rent the property for a period of time. After a period of time you occupied the property as your main residence. You continued to live in the property for a period of time. Subsequently you once again rented the property to tenants. You wish to treat the property as your main residence for this period.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-135 | Income Tax Assessment Act 1997 Section 118-145

Reasons for decision: Detailed Reasoning - Period prior to occupation: Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period. Section 118-135 of the ITAA 1997 extends the main residence exemption to take account of the time needed to move into a dwelling. It treats a dwelling as your main residence from the date it was acquired provided that you moved into it as soon as it was practicable to do so after it was acquired. However, the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 explains that section 118-135 of the ITAA 1997 is not extended to the situation where the individual is unable to move into the dwelling because it is being rented out. In this case, when you purchased the property an existing lease was in place. We do not consider that you moved into the property when it was first practicable to do so. Accordingly section 118-135 of the ITAA 1997 will not apply and the property will only become your main residence for capital gains tax (CGT) purposes once you moved into it. Section 118-145 of the ITAA 1997 allows you to choose to treat a dwelling as your main residence even though you no longer live 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. If you do use it to produce income (for example, you rent it out or it is available for rent) you can choose to treat it as your main residence for up to six years after you stop living in it. You cannot make this choice for a period before a dwelling first becomes your main residence. As the property was not your main residence prior to you moving into it, you are not eligible to make a choice under section 118-145 of the ITAA 1997 to treat the property as your main residence from the time of acquisition to when you moved into it. | Detailed Reasoning - Period subsequent to occupation: The choice under section 118-145 of the ITAA 1997 to continue to treat the property as your main residence is available for the period from when you moved out to the date it was disposed of. As this period is less than six years, the property will be considered to be your main residence for CGT purposes for the entire period.