Private ruling: Capital gains tax - main residence exemption
Published: May 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a partial main residence exemption upon disposal of your property? | A1: Yes.

Relevant facts and circumstances: You and your spouse purchased land in country A in the XXXX-XX financial year. The property sale settled in the XXXX-XX financial year. The land is less than 2 hectares. You sold your previous primary residence, which was located in country A, in the XXXX-XX financial year. After the sale of your previous primary residence, you lived with your sibling in law and in a rental property prior to moving into your new property. You applied for a planning permit, and construction of the dwelling commenced on the land in the XXXX-XX financial year. Construction of the dwelling finalised in the XXXX-XX financial year, and you moved in as soon as practicable after this date. You and your spouse moved to country B, on a short term contract in the XXXX-XX financial year. The contract was extended, and as a result you are still currently residing in country B. Due to the contract extension you have now purchased a property in country B. In your absence the country A property was used to produce assessable income. You intend to elect the country A property as your main residence under the absence rule. You intend on selling the country A property in the XXXX-XX financial year. You are currently a non-resident for Australian tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 118-B, | Income Tax Assessment Act 1997 section 118-110, | Income Tax Assessment Act 1997 section 118-145 and | Income Tax Assessment Act 1997 section 118-185.

Reasons for decision: Summary: As you are an individual, as the dwelling was your main residence for only part of the ownership period, and as the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person, you would be entitled to the partial main residence exemption under subdivision 118-B of the ITAA 1997. Any gain or loss on the disposal of the property asset would be partially disregarded. | Detailed Reasoning - Partial main residence exemption: Under Section 118-185 of the Income Tax Assessment Act 1997 (ITAA 1997) a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is partially disregarded if: • you are an individual; and • the dwelling was your main residence for only part of your ownership period; and • the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. | Detailed Reasoning - Choosing to treat land as your main residence while you build: Generally, if you build a dwelling on land you already own, the land does not qualify for exemption until the dwelling becomes your main residence for capital gains tax (CGT) purposes. However, you can choose to treat land as your main residence for up to four years before the dwelling becomes your main residence in certain circumstances. You can choose to have this exemption apply if you acquire an ownership interest (other than a life interest) in land and you: • build a dwelling on the land • repair or renovate an existing dwelling on the land, or • finish a partly constructed dwelling on the land. There are a number of conditions that you must satisfy before you can claim the exemption. You must first finish building, repairing or renovating the dwelling and then: • move into the dwelling as soon as practicable after it is finished • continue to use the dwelling as your main residence for at least three months after it becomes your main residence. As you purchased a piece of land, built your dwelling on the land, moved into the dwelling as soon practicable after it was finished and continued to use the dwelling as your main residence after it became your main residence, you can consider your piece of land to be your main residence. However as the dwelling on your land was completed after four years of acquiring your ownership interest in the land, the land can only be considered your main residence for a maximum period of four years. Any other days in your ownership period of the land, when the dwelling was being constructed are considered non-main residence days. Therefore you would not be eligible for the full main residence exemption and only be entitled to a partial main residence exemption. | Detailed Reasoning - 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 capital gains tax (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. As you have used your country A property to produce assessable income and as you intend to elect the country A property as your main residence during your period of absence, the country A property will be still be considered your main residence for a maximum period of up 6 years, despite currently living in country B. Furthermore this choice is not affected by you becoming a foreign resident during the period of absence.