Private ruling: CGT - Main residence exemption
Date of advice: 8 March 2017
Published: April 2017
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim a full capital gains tax (CGT) main residence exemption? | A1: No

Relevant facts and circumstances: You purchased a dwelling in December 20XX. You moved in as soon as practicable and treated the dwelling as your main residence. In June 20XX, you advertised for tenants to move in, whilst you still lived in the dwelling. The dwelling commenced producing assessable income in June 20XX. A portion of the property was being used for the production of assessable income, and the remainder was being used as your main residence. In 20XX, you moved out of the dwelling and rented other premises. The dwelling was then used 100% for the production of assessable income. You have lodged your return claiming a full main residence exemption in relation to the capital gain that resulted from the disposal of the dwelling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subdivision 118B | Income Tax Assessment Act 1997 Section 118-100 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-190 | Income Tax Assessment Act 1997 Section 118-192

Reasons for decision: Detailed Reasoning - Main residence exemption: Section 118-110 of the 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. Where you use part of your residence to produce income, you will only be entitled to a partial exemption. If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full or partial exemption. | Detailed Reasoning - Home first used to produce income rule: Section 118-192 of the ITAA 1997 sets out a special rule which is applied in working out a capital gain or loss on a dwelling which has been a main residence and which has also been used for income producing purposes. 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. The rule applies if: ● only a partial main residence exemption would be available under Subdivision 118-B of the ITAA 1997 because the dwelling was used for the purpose of producing assessable income during the taxpayer's ownership period ● the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996, and ● the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose. If these conditions are satisfied, the taxpayer is taken to have acquired the dwelling at the time they first started using it for income producing purposes for its market value at that time (subsection 118-192(2) of the ITAA 1997). This has the effect that the first element of the dwelling's cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes (and that expenditure incurred by the taxpayer prior to that day is ignored). | Detailed Reasoning - Absence rule: Section 118-145 of the ITAA1997 provides that if a dwelling was your main residence, you may continue to treat that part of it that was your main residence as your main residence during your absence. You cannot make this choice for a period before a dwelling first becomes your main residence; nor can you make this choice until such time that you cease living in the dwelling. Additionally, if you use any part of the property to produce income before you stop living in it, section 118-145 of the ITAA 1997 will not apply to that part. If you use that part of the dwelling that was your main residence to produce assessable income, the maximum period of time that you can treat it as your main residence is six years. If you make the choice to treat the dwelling as your main residence whilst you are absent, you may not treat any other dwellings as your main residence for that period. | Detailed Reasoning - Partial main residence exemption: Under subsection 118-190(1) of the ITAA 1997, your main residence exemption is reduced and you only get a partial exemption if: a) the dwelling which was your main residence was used for the purpose of producing assessable income; and b) you had interest on money borrowed to acquire the dwelling, you could have deducted some or all of that interest. Subsection 118-190(2) of the ITAA 1997 provides that your capital gain is increased reasonably, having regard to the extent to which you would have been able to deduct that interest. Subsection 118-190(3) of the ITAA 1997 provides that you ignore any use of the dwelling that was to produce assessable income during an absence under section 118-145 of the ITAA 1997, to the extent that it was not used to produce assessable income just before the absence occurred. | Detailed Reasoning - Application to your circumstances: You sold your dwelling in December 20XX, which triggers CGT event A1. You moved in to and lived in the dwelling from December 20XX to June 20XX. Subsequently, you advertised for two tenants and a portion of the dwelling was used to produce assessable income. The remainder of the dwelling continued to be your main residence until you moved out in 20XX. The dwelling was used to produce assessable income from June 20XX and only a partial main residence exemption may be claimed under Subdivision 118-B of the ITAA 1997. If you had have disposed of the property just before it began to produce assessable income, then you would have been entitled to a full CGT exemption for it being your main residence. Accordingly, the home first used to produce income rule will apply and you will be taken to have acquired the dwelling on the day you commenced using it to produce assessable income. The first element of the cost base and reduced cost base is taken to be the market value of the dwelling at that time. You are entitled to claim a partial main residence exemption under section 118-190 of the ITAA 1997, for the portion of the dwelling that was your main residence for the period June 20XX to a date in 20XX. You are also entitled to make the election under section 118-145 of the ITAA 1997 to continue to treat your dwelling as your main residence during a period of absence. However this choice cannot be made for any period prior to the date that you ceased living in the dwelling and the choice will only apply to the proportion of the dwelling that was not used to produce assessable income immediately before you stopped living in it. This will have the effect that you can claim a main residence exemption for the period from when you moved out in 20XX to 201XX (a period of less than six years) in relation to the portion of the dwelling that was your main residence just before you moved out.