Private ruling: Capital gains tax - main residence exemption - dependent child
Date of advice: 27 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will you be eligible for a full main residence exemption on the disposal of dwelling X? | A1: No. | Q2: Will you be eligible for a partial main residence exemption on dwelling X? | A2: Yes. | Q3: Will the first used to produce income rule apply to dwelling X? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 Section 118-110, | Income Tax Assessment Act 1997 Section 118-145 and | Income Tax Assessment Act 1997 Section 118-175 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 118-192

Reasons for decision: Summary: Generally, any capital gain or capital loss that you make on the sale of a property that was your main residence for your entire ownership period is disregarded. | Detailed Reasoning - Dependent children having different main residence: Section 118-175 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where a dwelling is your main residence and another dwelling is the main residence of a child of yours who is under 18 and is dependent on you for economic support, you must choose one of them as the main residence of both of you. You have chosen dwelling X as your main residence. | Detailed Reasoning - Absence choice: Section 118-145 of the ITAA 1997 provides that you can choose to continue to treat a dwelling as your main residence after it ceases to be your main residence. Where you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you stop living in it. You have chosen to continue to treat the dwelling as your main residence for the period from when your child turned 18 until the dwelling was used to produce assessable income. You are able to extend the period for a period of 6 years from the time the dwelling was first used to produce income. If you make the choice, you cannot treat any other dwelling as your main residence while you apply this section | Detailed Reasoning - Home first used to produce income rule: If you start using your main residence to produce income for the first time after 20 August 1996, a special rule may affect the way you calculate your capital gain or capital loss. You are taken to have acquired the dwelling at the time you first started using it for income producing purposes for its market value at that time if all of the following apply: • you acquired the dwelling on or after 20 September 1985 (post CGT); • you first used the dwelling to produce income after 20 August 1996; • when a CGT event happens in relation to the dwelling, you would obtain only a part 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. | Detailed Reasoning - Partial exemption: • Subsection 118-185(1) of the ITAA 1997 states that you may be eligible for a partial exemption where you are an individual and the dwelling was your main residence during only part of the period that you owned it and provides the formula for calculating the capital gain. | Detailed Reasoning - CGT Discount: As you have owned the property for more than 12 months you are eligible to use the CGT Discount or Indexation methods to calculate any capital gain. | Detailed Reasoning - Application to your situation: In your situation, you chose to treat the dwelling as your main residence for the period that the dwelling was the main residence of child A, who was under 18 and financially dependent on you. You then chose to continue to treat the dwelling as your main residence from the time that child A turned 18 until the maximum period permitted under the absence choice. You are entitled to a partial main residence exemption for any capital gain occurring to this property using the following formula: Total capital gain x non main residence days total days in your ownership period • Non main residence days are the period from the expiration of the absence choice until settlement of the contract for sale. • Total days in ownership period are from the date that the dwelling was first used to produce income until settlement of the contract for sale. Note 1: Dwelling Y was not your main residence for all of your ownership period, however, as you acquired the dwelling prior to 19 September 1985 the dwelling will retain its pre CGT status in accordance with paragraph 104-10(5)(a). Note 2: Where the contract for sale is settled in a later year of income, you are required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled.

Relevant facts: You and your spouse (you) were married prior to 19 September 1985. | You purchased dwelling Y prior to 19 September 1985. (Dwelling Y) | You resided in the dwelling from this time and this is where you raised your children. | Your youngest child, (Child A) was born after a period of time. | Child A commenced tertiary study, which required relocation from dwelling Y. | Child A was under 18 at the commencement of tertiary study and was dependant on you for economic support during the majority of their study. | Child A initially resided at a residential College, however this did not work well and as a result you decided to purchase dwelling X (dwelling X) for child A to reside. | Child A was under 18 during the initial period of residing at the dwelling X and remained dependant on you for economic support. | Child A was later joined in dwelling X by their sibling (child B), who resided in the dwelling for a number of years. | Child A remained residing in dwelling X until 200X. | Dwelling X was then used to produce assessable income. | Dwelling X was sold in the 20XX income year with settlement due in the 20XX income year. | You will treat the dwelling as your main residence for the period that you acquired it and up until child A turned 18. | You will make an absence choice in relation to dwelling X for the period it was used to produce income for a total period of X years.