Private ruling: CGT - main residence exemption
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Where you treat Property A as your main residence under section 118-145 and 118-170 of the Income Tax Assessment Act 1997 (ITAA 1997), will section 118-192 of the ITAA apply in calculating any capital gain or loss made on the sale of Property A? | A1: No

Relevant facts and circumstances: You purchased Property A in your own name. You resided in Property A for a period of time. You moved out of Property A and moved into a property you rented from a third party (rental property). You rented Property A to tenants and received rental income. However, you have continued to treat Property A as your main residence. Your spouse moved into the rental property with you after a period of time and you began to live together as a couple on a genuine domestic basis. Your spouse owns Property B; prior to moving into the rental property, your spouse lived in property B. You disposed of Property A during the relevant financial year. From the date they moved into the rental property, your spouse may continue to treat Property B as their main residence. If this is the case, you and your spouse will make the choice to have different main residences for the relevant period. You and your spouse had no other ownership interests in any other properties other than your respective interests in Property A and Property B for the relevant period.

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 118-170 | Income Tax Assessment Act 1997 Section 118-192

Reasons for decision: Summary: Section 118-110 of ITAA 1997 states that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period. | Detailed Reasoning - Continuing to treat a property as your main residence after you stop living in it: Section 118-145 of the ITAA 1997 allows you to choose to treat a dwelling as your main residence even though you no longer live in it. 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 stop living in it. If you do use it 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 you stop living in it. | Detailed Reasoning - Spouses with different main residences: Section 118-170 of the ITAA 1997 deals with circumstances in which a taxpayer and their spouse each have a dwelling as their main residence during a particular period of time. Applying the principle that only one dwelling at a time can qualify as a main residence, section 118-170 of the ITAA 1997 requires each spouse to: (a) choose one of the dwellings as the main residence for both of them; or (b) nominate different dwellings as each spouse's main residence. Where a nomination is made under (b), the availability of the main residence exemption is determined according to the following rules: (a) where a spouse's interest in the nominated dwelling is 50% or less, the nominating spouse will be entitled to an exemption on that interest for the whole period in question; and (b) where the relevant interest is greater than 50%, the nominating spouse will only be entitled to an exemption in respect of that interest for half the period. | Detailed Reasoning - Home first used to produce income rule: Under section 118-192 of the ITAA 1997, 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 its market value at that time if all of the following apply: · 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 first used the dwelling to produce income after 20 August 1996; · 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. ATO Interpretive Decision ATO ID 2003/1112 provides that there needs to be direct nexus between the reason the taxpayer would only be entitled to a partial main residence exemption and the income producing use of the property for section 118-192 of the ITAA 1997 to apply. | Detailed Reasoning - Application to your circumstances: In your case, Property A was your main residence for a period of time. You made the choice under section 118-145 of the ITAA 1997 to continue to treat Property A as your main residence after you moved out. You sold Property A within six years of making this choice. However, as a result of your choice under section 118-170 of the ITAA 1997 to choose a different main residence to your spouse, you are only entitled to the main residence exemption for half of the period that you had different main residences. Section 118-192 of the ITAA 1997 does not apply to your circumstances as the reason you are only entitled to a partial exemption is as a result of your choice to have a different main residence to your spouse rather than the income producing use of the property. Had your spouse made the choice to also treat Property A as their main residence for the relevant period, you would have been entitled to a full main residence exemption. Accordingly, you will not be taken to have acquired Property A for its market value on the day it was first used to produce income.