Private ruling: CGT main residence exemption
Date of advice: 26 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a full main residence exemption on your property? | A1: No. | Q2: Are you entitled to a partial main residence exemption on your property? | A2: Yes.

Relevant facts and circumstances: Around late 20XX you negotiated a contract to purchase an apartment overseas (the property). You were able to move into the property in late 20XX under a rental arrangement with the seller. You took possession of the property a few months later. The title to the property is in your name only. You lived in the property until early 20YY. You have rented the property since early 20YY. You have owned no other property. You purchased the property for approximately AUD$ XXX and you believe the approximate market value is AUD$ XXXX. You are contemplating the sale of this property.

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

Reasons for decision: Summary: Generally, if you are an individual you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: ● the dwelling must have been your home for the whole period you owned it ● you must not have used the dwelling to produce assessable income, and ● any land on which the dwelling is situated must be two hectares or less. | Detailed Reasoning - The absence rule: Section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997), also known as the absence rule, allows you to elect to treat a dwelling as your main residence even though you no longer live in it. If you use the dwelling to produce assessable income you can only claim main residence exemption for a period of up to 6 years. Section 118-145(4) of the ITAA 1997 states you cannot treat any other dwelling as your main residence in the period you choose to treat the vacated dwelling as your main residence. | Detailed Reasoning - Rule for home first used to produce income rule: In certain circumstances, 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 example the time you commenced leasing the dwelling to tenants) for its market value at that time if all of the following apply: ● you first used the dwelling to produce income after August 1996; ● 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 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. If you made the choice to continue to treat a dwelling as your main residence after the dwelling ceased to be your main residence, and the dwelling is fully exempt under the absence rule, the ‘home first used to produce income’ rule does not apply. If you made the choice to continue to treat a dwelling as your main residence after the dwelling ceased to be your main residence, but the dwelling is not fully exempt under the absence rule (for example because you leased it for more than six years), the ‘home first used to produce income’ rule does apply and you will only be entitled to a partial exemption. | Detailed Reasoning - Application to your circumstances: In your case, you acquired the property in 20XX and it was you main residence. You moved out and began to lease the property in early 20YY. You have no other property that you consider to be your main residence. However, as the property has been used to produce income for more than six years you will only be entitled to a partial main residence exemption. Additionally as the property was first used to produce income after August 1996 and you would have been entitled to a full exemption if you sold the property immediately before you used it to produce income, the home first used to produce income rule will apply. | Detailed Reasoning - Further Information: The following example may assist you in calculating any capital gain you may make in the future: Mary purchased a house for $500,000 under a contract that was dated 1 July 2008, and immediately started using the house as her main residence. On 1 July 2009 she moved interstate and began renting out the house. During the time she was interstate she did not acquire another dwelling and continued to rent out the house. She sold the apartment for $1,000,000 on 1 July 2017. She incurred $25,000 agent’s and solicitor’s costs. As Mary rented out the apartment, she is only entitled to choose to continue to treat the dwelling as her main residence during her absence for a maximum of six years; that is, for the period 1 July 2009 to 1 July 2014. As Mary is only entitled to a part CGT exemption, she first used the property to produce income after 20 August 1996 and she would have been entitled to a full CGT exemption for the dwelling immediately before she started renting it out, she treats the dwelling as having been acquired on 1 July 2009 (the day she started to rent it out) at the market value at that time, which was $600,000. Mary works out her assessable capital gain as follows: Capital proceeds – (Cost base + costs) = Total capital gain $1,000,000 – ($600,000 + $25,000) = $375,000 then: Total capital gain X (non-main residence days – 01/07/15 – sale) (total days of deemed ownership – 01/07/09 – sale) = Assessable capital gain $375,000 x 731 days 2,922 days = $69,894 Mary chooses to use the discount method to calculate her capital gain and, because she has no other capital gains or capital losses, she includes a net capital gain of $34,947 ($69,894 x 50%) on her 2018 tax return. Further information on the calculation of the capital gain/loss from a partial exemption, home first used to produce income rule and elements of the cost base can be found on our website ato.gov.au and entering Quick Code QC52195 , QC52191 and QC52174 respectively.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.