Private ruling: Capital gain and main residence
Date of advice: 14 December 2016
Published: May 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a full capital gains tax (CGT) exemption when selling a 50% share in your property? | A1: Yes.

Relevant facts and circumstances: You purchased a property as joint tenants. You lived in the property from the date of purchase for more than two years and then it was rented. Later you gained full ownership of the property following a court order under the Family Law Act 1975. This is the only property that you own. You would now like to sell 50% of your share in the property. You will retain 50% ownership in the property and intend to continue renting the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 paragraph 118-110(1)(b) | Income Tax Assessment Act 1997 section 118-145 | Income Tax Assessment Act 1997 section 118-178 | Income Tax Assessment Act 1997 section 118-190

Reasons for decision: Summary: Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity. You are considered to have disposed of a CGT asset if a change of ownership occurs. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). Main residence exemption Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: ● The residence must be your home for the whole period that you owned it (paragraph 118-110(1)(b) of the ITAA 1997). ● You must not have used the dwelling to produce assessable income (unless the temporary absence rule in section 118-145 of the ITAA 1997 applies) (section 118-190 of the ITAA 1997). For the main residence exemption to apply for your whole ownership period, you must move into the dwelling as soon as practicable after you acquire the dwelling. Absence rule As a general rule, a dwelling is no longer your main residence once you stop living in it. However under section 118-145 of the ITAA 1997 you may choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it. This choice needs to be made only for the income year that the CGT event happens to the dwelling, for example the year that you enter into a contract to sell it. Under subsection 118-145(2) of the ITAA 1997, if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence. However if you make this choice, you cannot treat any other dwelling as your main residence while you apply this section. In your case you have used your property to produce assessable income. You have not owned or treated any other dwelling as your main residence during your absence. Marriage or relationship breakdowns Section 118-178 of the ITAA 1997 applies if: (a) you acquired an ownership interest in a dwelling from another person (your former partner) as a result of a CGT event (the earlier event), (b) your former partner acquired the ownership interest on or after 20 September 1985, (c) there was a roll-over under Subdivision 126-A (dealing with marriage or relationship breakdown) for the earlier event, and (d) a CGT event (the later event) happens in relation to the ownership interest. In this situation, the main residence exemption in Subdivision 118-B of the ITAA 1997 applies to the later event in the way that it would if: (i) your ownership interest had commenced when the former partner's ownership interest commenced (the acquisition time), and (ii) from the acquisition time until the time the former partner's ownership interest ended, you had used the dwelling in the same way that your former partner used it and the dwelling had been your main residence for the same number of days as it was your former partner's main residence. This means that the main residence exemption rules take into account the way in which both the transferor and transferee spouses used the dwelling, during their combined period of ownership, when determining the transferee spouse's eligibility for the main residence exemption. In your case, you acquired your second interest in the property because of a court order under the Family Law Act 1975 and there was a roll over under Subdivision 126-A of the ITAA 1997. You acquired an interest in the property on original purchase. You are also considered to acquire your additional interest on the same date as outlined above. The property was used as your main residence. You then started renting the property. As you occupied the property as your main residence for more than two years, then rented it out for approximately two and a half years, you meet the requirements outlined in section 118-145 of the ITAA 1997. You have not treated any other dwelling as your main residence during your absence and are therefore entitled to a full main residence exemption.