Private ruling: Main residence exemption
Date of advice: 12 April 2017
Published: September 2017
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the main residence exemption from capital gains tax apply where a dwelling was your main residence for only part of the time you owned the property? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 100-20 | Income Tax Assessment Act 1997 Section 100-35 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT): CGT is the tax that a taxpayer pays on any capital gain included in their annual income tax return. It is not a separate tax, merely a component of their income tax. The taxpayer is taxed on their net capital gain at their marginal tax rate. Their net capital gain is calculated by subtracting any capital losses that they may have accrued from their capital gains made in that income year. Any net capital gain is then included in their assessable income. A taxpayer makes a capital gain or capital loss if a CGT event happens. For most CGT events, their capital gain is the difference between their capital proceeds and the cost base of their CGT asset. CGT events are the different types of transactions or events that may result in a capital gain or capital loss. If the taxpayer disposes of land or a home (CGT event A1), the CGT event happens when they enter into the contract for. In certain circumstances, there may be an exemption or exception that can apply, which means that the gain or loss created by the CGT event is disregarded. | Detailed Reasoning - Main residence: Under the Income Tax Assessment Act , if you are an individual not a company or trust 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. You can only claim the full main residence exemption where all of the following are satisfied: ● there was a dwelling on the property when you sold it ● the dwelling was your main residence for the whole of your ownership period ● you did not choose to treat any other dwelling as your main residence under the capital gains tax provisions during any part of your ownership period ● the property is less than two hectares in size, and ● the property was not used to earn assessable income. You cannot claim the full main residence exemption because it was not your main residence for the whole of the ownership period and it was used to earn assessable income during part of the ownership period. However, you can claim a partial main residence exemption as the property was your main residence during at least some of your ownership period. | Detailed Reasoning - Partial exemption: If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are only eligible for a partial. The full exemption is proportionately reduced by reference to the period that the property was not your main residence. You calculate the part of the capital gain that is taxable as follows: Total capital gain made Number of days in your ownership period From CGT event X when dwelling was NOT your main residence Total number of days in your ownership period | Detailed Reasoning - Example calculation: Taxpayer X acquired a dwelling on 20 October 2005 which they let out to tenants until 21 October 2008, from which date they used the dwelling as their main residence. Taxpayer X eventually sold the dwelling on 8 September 2010 and made a capital gain of $40,000, calculated without regard to the exemption provisions. The capital gain is reduced pro rata by reference to the period Taxpayer X used the dwelling as their main residence. The reduced capital gain is: $40,000 × 1,098 ( number of days from 20 October 2005 to 21 October 2008 ) 1,785 ( number of days of Taxpayer X's ownership ) = $24,605 | Detailed Reasoning - Conclusion: In your case, you are eligible for a partial main residence exemption. You can calculate the capital gain that will have to be included in your assessable income using the above formula.

Relevant facts: You purchased a property after 20 September 1985 (the dwelling) | You rented the property for a period of time. | The dwelling was your main residence for a period of time. | You undertook employment overseas for a number of years. | During the period when you were overseas the property was not used to produce income. | You continued to treat the dwelling as your main residence for this time. | The property was subsequently sold.