Private ruling: CGT- Main Residence Exemption
Date of advice: 22 February 2017
Published: August 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Can you apply the Main Residence Exemption to Property A? | A1: Yes. | Q2: Will you make a Capital Gain on the sale of Property B? | A2: Yes.

Relevant facts and circumstances: You and your spouse purchased land (Property A). A dwelling was built on Property A. This property became your principal place of residence. You occupied Property A up until you ceased living at this address to begin travelling Australia. Whilst travelling, property A was still viewed as your Principal Place of Residence. The dwelling was rented out for approximately five years. You returned to the property and occupied it again for approximately three months. The dwelling was rented again for 18 months. You will resume occupancy of Property A permanently after this period. You and your spouse purchased land (Property B). A dwelling was built on Property B. The property was rented for 12 years. You and your spouse then occupied Property B for three years while you did a full internal renovation. You did not view Property B as your main residence during this time. Property B was sold in the 2017 financial year.

Relevant legislative provisions: Section 100-10 Income Tax Assessment Act 1997 | Section 100-20 Income Tax Assessment Act 1997 | Section 102-20 Income Tax Assessment Act 1997 | Section 104-10 Income Tax Assessment Act 1997 | Section 108-5 Income Tax Assessment Act 1997 | Section 118-110 Income Tax Assessment Act 1997 | Section 118-145 Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Capital Gains Tax- Main Residence Exemption:: The CGT Exemptions are set out in Division 118 of the Income Tax Assessment Act 1997 (ITAA 1997). In particular, Subdivision 118-B of the ITAA 1997 contains the main residence exemption. This exemption disregards a capital gain or capital loss you make from a CGT event that happens to a dwelling, or your ownership interest in a dwelling which is your main residence. A capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if: ● You are an individual ● The dwelling was your main residence throughout your ownership period ● The property was not used to produce assessable income, and ● Any land on which the dwelling is situated is not more than two hectares | Detailed Reasoning - CGT Main Residence Exemption Absence Rule:: There are several extensions and limitations to the main residence exemption. These can affect your entitlement to the main residence exemption, depending upon your individual circumstances. For example, there is an extension to the basic rule which allows you to continue the main residence exemption after the dwelling ceases to be your main residence. This is found in section 118-145 of the ITAA 1997 and is commonly known as the absence rule. This section provides that if you leave your dwelling, such that it is no longer your main residence, you may choose to continue to treat it as your main residence, even if you have rented it out, provided certain criteria are met. If you use the dwelling to produce income, the maximum length of time you can choose to treat it as your main residence is six years after it starts producing income. You are entitled to another maximum six years each time the dwelling becomes and ceases to be your main residence. The commissioner does not have the discretion to extend the six year period. If you choose to apply this exemption, no other property can be treated as you main residence during this period. In your case, you are entitled to apply the main residence exemption to Property A, as the rental period did not exceed the six years and you did not treat another property as your main residence during this time. Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else. The capital gain is calculated as the difference between the capital proceeds received and the cost base of the property. Property B is a CGT asset acquired after 20 September 1985. CGT event A1 occurred when you sold the property. Property B has been used to produce rental income and is not your main residence. Therefore you will make a capital gain from the sale of Property B.