Private ruling: Capital Gains Tax - main residence - absence rule
Date of advice: 7 October 2015
Published: November 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to apply a full capital gains tax (CGT) main residence exemption on the sale of your property? | A1: Yes.

Relevant facts and circumstances: You purchased a property and moved into it. A number of years later you purchased another property and used your first property to produce rental income. Less than six years later you ceased using your first property as a rental property. Your intention was to move back into this property however, circumstances beyond your control prevented this. During the time that the first property was intended to be your residence it did not produce nor was it available to produce assessable income. The first property was sold after it had been empty for some months.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145

Reasons for decision: Detailed Reasoning - Main residence exemption: The main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) may allow a taxpayer to disregard all or part of any capital gain or capital loss they made from a capital gains tax (CGT) event that happens to their ownership interest in a dwelling where the dwelling was their main residence. The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayer's main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person. However, subject to the absence rule, a taxpayer will only get a partial exemption for a CGT event that happens in relation to their ownership interest in a property if the dwelling was their main residence for only part of their ownership period. | Detailed Reasoning - The absence rule: The absence rule under section 118-145 of the ITAA 1997 allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence. This choice needs to be made only for the income year that the CGT event happens to the dwelling for example, the year that a taxpayer enters into a contract to sell it. If a taxpayer owns both a dwelling that they can choose to treat as their main residence after they no longer live in it, and a dwelling they actually lived in during that period of time then they make the choice for the income year they enter into the contract to sell the first of those two dwellings. If a taxpayer makes this choice, they cannot treat any other dwelling as their main residence for that period. | Detailed Reasoning - Used to produce income: If you use the dwelling to produce income you can choose to treat it as your main residence for up to six years after you cease living in it. If you are absent more than once during the period you own the home, the six-year maximum period that you can treat it as your main residence while you use it to produce income applies separately for each period of absence. In your case it is accepted that you are entitled under subsection 118-145(1) of the ITAA 1997, to treat your first property as your main residence during the period you were renting it out because the dwelling was occupied first as your main residence and then used to produce income for less than six years. Previous to the sale of your first property it became vacant in preparation of you moving back in. However, due to unforseen issues you were not permitted to do so. You sold the dwelling sometime later, outside of the six year absence period. However subsection 118-145(3) of the ITAA 1997 allows you to use the dwelling as your main residence if it is empty indefinitely. In your case you are still entitled to a CGT exemption as the dwelling ceased to be or available to be income producing and was vacant until the sale. As you have chosen to treat the property as your main residence, the property was occupied before being let out and the rental period did not exceed six years after which it lay vacant, the dwelling would be considered to be your main residence for the entire ownership period. Therefore you can disregard the capital gain from the sale of the dwelling.