Private ruling: Main residence CGT exemption
Published: January 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a partial main residence exemption in relation to Property A? | A1: Yes

Relevant facts and circumstances: You acquired a property (Property A) and it immediately became your main residence. After a period of time you began leasing Property A and it has been tenanted ever since. You made the choice to continue to treat Property A as your main residence for capital gains tax (CGT) purposes after you moved out. Prior to leasing Property A, it had never been used to produce assessable income. During the six year period after you began to lease Property A you had not purchased another main residence. You are now considering purchasing a new property that will become your main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-192

Reasons for decision: Summary: You can generally claim the main residence exemption to ignore a capital gain or capital loss from a CGT event that happens to your home. To get the exemption, the property must have a dwelling on it and you must have lived in the dwelling. | Detailed Reasoning - Absence rule: As a general rule, a dwelling is no longer your main residence once you stop living in it. However, in some cases you can choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it. If you make this choice, you cannot treat any other dwelling as your main residence for that period. You can choose however, when you want to stop the period covered by this choice subject to the following conditions. 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 cease living in it. If you use the dwelling 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 the day you cease living in it. | Detailed Reasoning - Rule for home first used to produce income rule: In certain circumstances, if you start using your main residence to produce income, there is a special rule that affects the way you calculate your capital gain or capital loss. In working out the amount of capital gain or capital loss, the period before the dwelling is first used to produce income is not taken into account. You are taken to have acquired the dwelling at the time you first started using it for income producing purposes (for example the time you commenced leasing the dwelling to tenants) for its market value at that time if all of the following apply: · you first used the dwelling to produce income after 20 August 1996; · when a CGT event happens in relation to the dwelling, you would obtain only a partial exemption because the dwelling was used to produce assessable income during the period you owned it; and · you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income. If you made the choice to continue to treat a dwelling as your main residence after the dwelling ceased to be your main residence, and the dwelling is fully exempt under the absence rule, the 'home first used to produce income' rule does not apply. If you made the choice to continue to treat a dwelling as your main residence after the dwelling ceased to be your main residence, but the dwelling is not fully exempt under the absence rule (for example because you leased it for more than six years), the 'home first used to produce income' rule does apply and you will only be entitled to a partial exemption. | Detailed Reasoning - Application to your circumstances: In your case, you acquired Property and it was your main residence. You moved out and began to lease Property A; you made the choice to continue to treat the property as your main residence. However, as Property A has been used to produce income for more than six years you will only be entitled to a partial main residence exemption. Additionally, as Property A was first used to produce income after 20 August 1996 and you would have been entitled to a full exemption if you sold Property A immediately before you used it to produce income, the home first used to produce income rule will apply.