Private ruling: Capital gains tax - main residence exemption
Date of advice: 25 February 2016
Published: April 2016
Ruling period: Income year ended 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Will you be entitled to a full main residence exemption on the disposal of your ownership interest in Property A? | A1: Yes.

Relevant facts and circumstances: You jointly purchased a property (Property A) with settlement occurring after 20 September 1985. The land area of Property A is less than two hectares. You moved into Property A on the date that settlement occurred. You moved out of Property A over two years after you had purchased the property and moved interstate. You lived interstate for around 12 months and Property A was rented out during this period. You jointly purchased another property (Property B) with settlement occurring while you were interstate. You moved into Property B after you had returned from interstate. Property A was rented out from the time you returned from interstate until the property was sold. Property A was put on the market with the settlement on the sale of the property occurring around three years after you had returned from living interstate. You have made the absence choice in relation to Property A for the period that it was rented out.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-140 | Income Tax Assessment Act 1997 Section 118-145

Reasons for decision: Detailed Reasoning - Main Residence Exemption: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted. In certain circumstances, there may be an exemption that can apply, which means that the gain or loss created by a capital gains tax (CGT) event is disregarded. Exemptions from CGT are set out in Division 118. In particular, Subdivision 118-B contains the CGT main residence exemption. The exemption disregards a capital gain or capital loss you make from a CGT event that happens to your ownership interest in a dwelling, which is your main residence under section 118-110. 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. If you own more than one dwelling during a particular period, only one dwelling can be your main residence at any one time except in limited circumstances when moving from one main residence to another. | Detailed Reasoning - Continuing main residence status during absence: In some cases you can continue to treat a dwelling as your main residence during periods of absence. If the dwelling is not used to produce income it can be treated as your main residence indefinitely. If the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is six years. You are entitled to another period of six years each time the dwelling again becomes your main residence and then commence using it again to produce income. If you make this choice, you cannot treat any other dwelling as your main residence while you apply this section. Application to your situation You jointly purchased Property A and resided in it for a number of years until you moved out of the property to go and live interstate. You lived interstate for around 12 months and when you returned you resided in Property B. Property A was rented out from the time you moved out of it to live interstate until settlement on the disposal of the property occurred. You have made the absence choice in relation to Property A for the period it was rented out. The period of time that you resided in Property A and the period of time covered by the absence choice cover your entire ownership period of your ownership interest in Property A. Accordingly, Property A was your main residence during all of your ownership period until settlement occurred on the sale of the property. Therefore, you will be able to fully disregard any capital gain or capital loss made on the sale of Property A. | Detailed Reasoning - Further issues for you to consider: The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith. | Detailed Reasoning - Moving from one main residence to another: As outlined above, only one dwelling can be your main residence at any one time. However, if you acquire an ownership interest in a property that is to become your main residence and you still have your ownership interest in your existing main residence, both properties are treated as your main residence for up to six months ending when your ownership of your existing main residence ends. It does not matter if the property you are selling is your existing main residence due to you making a choice to continue treating it as your main residence when it would otherwise have ceased to be so. Accordingly as you have made the choice to continue to treat Property A as your main residence from the date when Property A was first available for rent until settlement occurred on the disposal of the property, Property B will also be treated as your main residence from six months before the settlement on Property A occurred. As outlined above, the main residence exemption only applies to properties up to two hectares in size. Therefore, the main residence exemption will not apply to all of Property B. Given that Property B will not be your main residence for all of your ownership period, you will only be entitled to a partial main residence exemption when you dispose of Property B (being two hectares of Property B).