Private ruling: Capital gains tax - main residence exemption
Published: April 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and answers | 1. Are you entitled to the main residence exemption for Property 1 for the period beginning when it was purchased and ending when you sold your share of the property to your spouse? | Yes. | 2. Are you entitled to any main residence exemption for Property 2 for the period that you owned Property 2 and had nominated Property 1 as your main residence? | No. | 3. Are you entitled to the main residence exemption for Property 2 for the period that you nominated it as your main residence? | Yes.

Relevant facts and circumstances: You and your spouse purchased Property 1 several years ago. This property is less than 2 hectares in size. You lived in Property 1 as your main residence. During this time the adjacent land was not used for income producing purposes. Some years later, you and your spouse moved to a new location and from that time Property 1 was rented out. You and your spouse then purchased Property 2. This property is less than 2 hectares in size. You did not use the adjacent land for income producing purposes. You moved into Property 2 several months after you purchased it, following renovations. Later on, you transferred your ownership interest in Property 1 to your spouse. You nominated Property 1 as your main residence for the period that you owned it. In the year ended 30 June 2012 you and your spouse sold Property 2 and moved into a rental property. You nominated Property 2 as your main residence from the time you sold your interest in Property 1 to your spouse, until the date of sale of Property 2. You have told us that your spouse nominated Property 2 as their main residence for the period beginning when they no longer nominated Property 1 as their main residence, until when Property 2 was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Subsection 108-5(1). | Income Tax Assessment Act 1997 Section 118-110. | Income Tax Assessment Act 1997 Section 118-145. | Income Tax Assessment Act 1997 Section 118-170.

Reasons for decision: Summary: Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property. Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss. The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity. In your case, CGT event A1 happened when you sold Property 1 and when you sold Property 2. Main residence exemption Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income. Six year absence rule Section 118-145 of the ITAA 1997 states that you may choose to continue to treat a dwelling as your main residence when you cease to live in that dwelling. However, if you use your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence while you are absent is six years. Spouses with different main residences If, during a period, a dwelling is your main residence and another dwelling is the main residence of your spouse, only one of the dwellings can be treated as the main residence of both you and your spouse for that period (section 118-170 of the ITAA 1997). Alternatively, both dwellings can be treated as main residences for the period. If this happens, the exemption is split. If your interest in the dwelling is not more than half of the total interests held by all persons in the dwelling, it is taken to be a main residence during the whole of the period. Otherwise, the dwelling is taken to be your main residence for only half of the period. | Detailed Reasoning - Application to your circumstances:: Property 1 In your case, both you and your spouse have nominated Property 1 as being your main residence for the period beginning when you purchased it, until you sold your share of the property to your spouse. Therefore, you are entitled to a full main residence exemption under section 118-110 of the ITAA 1997 on Property 1 for this period. Property 2 As you nominated Property 1 as being your main residence prior to the date you sold your interest in it to your spouse, you are not entitled to any main residence exemption for the period beginning when you purchased Property 2 and ending when you sold your interest in Property 1. For the period when you sold your share of Property 1 to your spouse, until when your spouse ceased to nominate Property 1 as their main residence, you and your spouse nominated different main residences. During this time you nominated Property 2 as being your main residence. However, as your ownership interest in Property 2 is not more than half, it is taken to be your main residence during the whole period under section 118-170 of the ITAA 1997. Both you and your spouse have nominated Property 2 as being your main residence for the period beginning when your spouse ceased to nominate Property 1 as their main residence and ending when you sold Property 2. Therefore, you are entitled to a full main residence exemption under section 118-110 of the ITAA 1997 on Property 2 for this period.

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