Private ruling: Capital gains tax - main residence exemption
Date of advice: 16 August 2017
Published: November 2017
Ruling period: Income year ending 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will you be entitled to a full main residence exemption on the sale of Property B under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will you be entitled to a partial main residence exemption on the sale of Property B under section 118-185 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: Prior to 20 September 1985, you and your family moved into your parent’s residence (Property A). After 20 September 1985, you and your spouse jointly purchased a property (Property B). You and your family moved into Property B and it was your main residence. A number of years after Property B was purchased, the health of your parents declined and you became their primary carer. Your parents gifted you Property A, with the title of the property being transferred into your name in the year you became their carer. You and your family moved solely into Property A the month after the title had been put in your name. You made the choice for Property A to be your main residence from the time you acquired your ownership interest in the property. Your spouse made the choice for Property A to be their main residence from the time you acquired your ownership interest in Property A. A number of years after you and your family moved into Property A you and your spouse sold Property B and have made a capital gain as a result of its sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Detailed Reasoning - Main residence exemption: Generally, any capital gain or capital loss that you make on the sale of a dwelling that was your main residence for your entire ownership period is disregarded under the capital gains tax (CGT) provisions. However, in order to obtain a full exemption from CGT, the dwelling must have been the taxpayer’s main residence for the entire period they owned it and must not have been used to produce assessable income. If a taxpayer owns more than one dwelling during a particular period, only one dwelling can be their main residence at any one time. | Detailed Reasoning - Spouse having different main residence: Where spouses, such as husbands and wives, have separate main residences, they must nominate which dwelling is their main residence during the period they have separate main residences. You can nominate one dwelling as the main residence for both of you or each nominates a separate dwelling. The nomination rule applies to each home the spouses own whether or not each spouse has an interest in the property. | Detailed Reasoning - 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 are entitled to a partial exemption. You calculate your capital gain using the following formula: Capital gain X ________ Non-main residence days_________ Total number of days in your ownership period Capital gain will be calculated as the difference between the capital proceeds received on the disposal of the dwelling, and the dwelling’s cost base. Non-main residence days will be the total number of days that the dwelling is not considered to be your main residence. Days in your ownership period will be the total days from the date of settlement of the contract of purchase of the dwelling until the date of settlement of the contract of sale when the dwelling is sold. Application to your situation In your situation, you and your spouse jointly purchased Property B after 20 September 1985 and it was your main residence. The title of Property A was transferred into your name a number of years later and you and your family moved into Property A around a month after the title in Property A was transferred into your name. As outlined above, if you own more than one dwelling during a particular period, only one dwelling can be your main residence at any one time. For the period from when the title of Property A was transferred into your name until Property B was sold, you owned two dwellings. You and your spouse both made the choice for Property A to be your main residence from the time you acquired your ownership interest in it. You and your spouse sold Property B a number of years later. Therefore, as you and your spouse made the choice for Property A to be your main residence from the time you acquired your ownership interest in it, you will not be entitled to apply to a full main residence exemption to Property B from the time you acquired your ownership interest in Property A until settlement on the sale of Property B occurred. As a result of that choice Property B was not your main residence for the whole of your ownership period and you are not entitled to a full main residence exemption. However, you will be entitled to a partial main residence exemption for the period from the date settlement on the purchase of Property B occurred until the date the title of Property A was transferred into your name. The capital gain made on the disposal of your 50% ownership in Property B will be calculated using the formula provided above and: ● your non-main residence days will start from the date you acquired your ownership interest in Property A until the date settlement on the sale of Property B occurred; and ● the total number of days in your ownership period will commence from the date settlement on the purchase of Property B occurred and will end on the settlement date on the sale of Property B occurred. Note: If you do not use the indexation method to calculate the capital gain, you will be able to reduce the capital gain made on the sale of your ownership interest in Property B by the 50% CGT discount.