Private ruling: CGT - main residence exemption
Date of advice: 10 September 2025
Published: 17 November 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you eligible for a full capital gains tax (CGT) exemption for the dwelling and adjacent land up to 2 hectares located at property 1? | A1: No. | Q2: If the answer to question 1 is no, are you eligible for a partial CGT exemption for the dwelling and adjacent land up to 2 hectares located at property 1? | A2: Yes.

Relevant facts and circumstances: In the facts below, the expressions 'you' and 'your' refer to taxpayer 1 and taxpayer 2 and are used interchangeably throughout. You are each other's spouse. In mid-to-late 20XX you purchased a property in Australia (property 1) which you each own a 50% ownership interest in. The property is over 2 hectares in size, that is mainly bush and trails which your children used for recreational purposes, and none of the land has ever been used for income earning activities. Apart from another property that taxpayer 2 owned as an investment / rental property which has now been sold, neither taxpayer 1 nor taxpayer 2 have owned any other properties since the property was purchased. Regarding taxpayer 2's investment property, taxpayer 2 has never lived in that property, nor did they claim any CGT main residence exemption when it was sold. Taxpayer 2 paid CGT upon the sale, where the settlement took place in late 20XX. Living arrangements You have a blended family, with two teenage children from taxpayer 2's previous relationship (child 1 and child 2), and the child from your current relationship (child 3) who is x years of age. Due to shared custody of child 1 and child 2, you have lived in a one week-on/week-off and then a two week-on/two week-off arrangement between the property, and another Australian property which you rent as a tenant (property 2). More specifically, during the periods with child 1 and child 2, one or both of you would stay at property 2 to maintain school access and court-mandated custody arrangements. During weeks without child 1 and child 2, you lived and worked at property 1 on a full-time basis. Child 3 remained with you full-time, and frequently stayed at property 1 with taxpayer 1 whilst taxpayer 2 travelled to property 2 for custody duties. For the first two years you owned the property, taxpayer 2 would have spent most of their time living at the property, with taxpayer 1 spending slightly more of their time living at the property (due to taxpayer 1 staying at the property with child 3 whilst taxpayer 2 spent weeks in property 2 with child 1 and child 2). In early to mid 20XX, you originally moved into property 2, where you signed a two- year lease. Since that time, you have renewed the lease on a yearly basis. Your future intentions regarding property 2 are to cancel the lease as soon as you can. Once property 1 is sold, you intend on purchasing another residence in the same Australian city as property 2 which will be your primary place of residence. You now need to live in the same Australian city as property 2 due to the custody arrangements with child 1 and child 2. Use of the property You lived in property 1 as your main residence since it was purchased, having moved all your furniture, belongings, personal effects, photos, and key possessions to the property. You connected utilities and used the property for day-to-day family life. When you first purchased property 1, you moved some of your older preferred furniture from property 2 to the property, and you also purchased some new furniture for property 1. You left some older and less preferred furniture in property 2, which left minimal furniture from that point. You later found this to be a mistake, as it left property 2 a sterile house where child 1 and child 2 did not really want to be there. You advertised workshops and inhouse strategy for your business from your home office at property 1, however no business income was derived at property 1. You attempted to move child 1 and child 2 to the property, however this was blocked by their biological parent via legal proceedings. This prevented you from living in property 1 on a full-time basis. You used the address of property 2 for your business, as you work with large companies, and that address was more central and confidence building for them. Property 1 was first used to produce income in early 20XX via use of short-term rental on Airbnb to assist with financial pressures you were facing at the time. The use of property 1 as a short-term rental on Airbnb has been limited, only xx nights in the past 12 months. During this period, you have continued to use property 1 as your main residence for weekends, every second or third week, and holidays. You left all your belongings at property 1 when it was rented out on Airbnb, and not all areas of the property were made available to the short-term renters. Apart from the short-term rental on Airbnb, you have not used property 1 for income producing activities. In mid-20XX, you attempted to sell property 1 due to financial pressure. However, you later took property 1 off the market in late 20XX after a potential sale did not eventuate. You have now listed the property for sale again due to ongoing costs and emotional stress. You have completed renovations to the property totalling $X during the period you have owned the property. You will continue to use the property in the same way (as your main residence) up until the property is sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-120 | Income Tax Assessment Act 1997 section 118-145 | Income Tax Assessment Act 1997 section 118-190 | Income Tax Assessment Act 1997 section 118-192 | Income Tax Assessment Act 1997 Division 115

Reasons for decision: Summary: Property 1 has been your main residence since you originally purchased it and has continued to be throughout your entire ownership period, with you having never vacated the property. However, whilst property 1 continued to be your main residence, the property was first used to produce income in early 20XX via use of short-term rental on Airbnb. Thus, the special rule in section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to your case. Therefore, you are taken to have acquired property 1 for its market value at the time you first started using the property for income producing purposes. As a dwelling will only cease to be your main residence once you stop living in it (i.e. when you move out), you cannot elect for property 1 to continue to be your main residence under the absence rule (see section 118-145 of the ITAA 1997) and then ignore the income producing use of property 1 from early 20XX under subsection 118-190(3) of the ITAA 1997. In addition, as property 1 was used to produce income for a period from early 20XX, there will be an adjustment required under section 118-190 of the ITAA 1997, meaning that you will only be entitled to a partial CGT Main residence exemption. Further to this, as property 1 is over 2 hectares in size, you will be subject to CGT on the remaining part of property 1 that exceeds 2 hectares in accordance with section 118-120 of the ITAA 1997. The CGT general discount also applies as you have held property 1 for more than 12 months after you first used it to produce income. | Detailed Reasoning - Detailed reasoning: CGT event A1 happens when you dispose of a CGT asset you own. When you sell the property, CGT event A1 will occur for you, and at that time you will need to determine any capital gain or loss from the event. Main residence exemption - basic conditions and extension to adjacent land Section 118-110 of ITAA 1997 provides that a taxpayer can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is their main residence. To qualify for the full exemption, the dwelling must have been your main residence throughout your ownership period and must not have been used to produce assessable income. Section 118-120 of the ITAA 1997 extends the main residence exemption available under section 118-110 to a dwelling's adjacent land up to 2 hectares in area provided that the adjacent land was used primarily for private or domestic purposes in association with the dwelling. Taxation Determination TD 1999/67 Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares, can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land? states that you can apply the main residence exemption to whichever area of land you choose in addition to the land on which your dwelling is situated, provided that the total of the land does not exceed 2 hectares and that a capital gain or loss you make from the land is only disregarded under the main residence exemption if it is used primarily for private or domestic purposes in association with your dwelling. Special rule - first used to produce income If you used your property to produce income, under subsection 118-192(2) of the ITAA 1997, you are taken to have acquired your ownership interest in the dwelling at the date it was first used to produce income for its market value at that time. Main residence exemption - absence choice Section 118-145 of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence (the absence choice). 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 is 6 years. The term 'ceases' in subsection 118-145(1) of the ITAA 1997 is not defined in the Act. However, the example accompanying subsection 118-145(4) of the ITAA 1997 deals with absences of periods of significant length of time that resulted from the owner moving out of their home. This example is listed below: You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out). You then move back into it for 3 years, after which you sell the house. You have not treated any other dwelling as your main residence during your absences. You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years. You can make this choice when preparing your income tax return for the income year in which you sold the house. Therefore, as a general rule, a dwelling will only cease to be your main residence once you stop living in it (i.e. when you move out). Adjustment to the CGT main residence exemption for periods of income producing use Usually, you cannot get the full main residence exemption if you acquired your dwelling on or after 20 September 1985, used it as your main residence and you: • Used any part of it to produce income during all or part of the period you owned it, and • Would be allowed a deduction for interest had you incurred on money borrowed to acquire the dwelling (interest deductibility test). Section 118-190 of the ITAA 1997 is directed at reducing the main residence exemption and only allowing you a partial exemption if the property is used for income producing purposes. Subsection 118-190(2) of the ITAA 1997 factors an adjustment that is reasonable having regard to the extent to which you would have been able to deduct interest. Paragraph 4 of Taxation Determination TD 1999/66 Income tax: capital gains: what factors should be taken into account in determining the 'amount that is reasonable' in applying subsection 118-190(2) of the Income Tax Assessment Act 1997? provides the general rule for apportioning the main residence exemption is to adjust based on floor area and the period of income-producing use. Application to your circumstances Based on the facts provided and your overall circumstances, property 1 has been your main residence since you originally purchased it and has continued to be throughout your entire ownership period, with you having never vacated property 1. Property 1 was first used to produce income in early 20XX via use of short-term rental on Airbnb to assist with financial pressures you were facing at the time. Therefore, under subsection 118-192(2) of the ITAA 1997, you are taken to have acquired your ownership interest in property 1 for its market value at the date it was first used to produce income (in early 20XX). In addition, whilst property 1 was used to produce income in early 20XX via use of short-term rental on Airbnb, you do not qualify to use the absence rule under section 118-145 of the ITAA 1997 from this time, as based on your overall circumstances you did not vacate property 1 during the time it was used to produce assessable income, and you continued to use it as your main residence throughout this period. Therefore, you cannot ignore the income producing use of property 1 from early 20XX under subsection 118-190(3) of the ITAA 1997. As noted above, subsection 118-190(2) of the ITAA 1997 factors an adjustment that is reasonable having regard to the extent to which you would have been able to deduct interest. In your case, this is the occupancy expenses (loan interest) that you would have been able to claim relating to the Airbnb use of property 1. Following on from this, in your case, section 118-190 of the ITAA 1997 requires you to make the required adjustment based on percentage of the floor space used for the income producing activity, and for the relevant periods when property 1 was used to produce income (used on Airbnb to generate rental income) in accordance with paragraph 4 of TD 1999/66. In addition, whilst the total adjacent land area of property 1 was used primarily for private or domestic purposes in association with the dwelling, as property 1 is over 2 hectares in size, you will also need to pay CGT on the remaining part of property 1 that exceeds the 2 hectares. Further guidance on how to calculate any capital gain or loss you make on the remainder of your land can be found in TD 1999/67. Conclusion Therefore, whilst you are not eligible for a full CGT main residence exemption for property 1, you will be entitled to a partial CGT main residence exemption factoring in the adjustments listed above. You are also entitled to apply the 50% discount when calculating the capital gain as you have held your ownership interest for more than 12 months.