Private ruling: Capital gains tax - main residence exemption
Published: April 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and answers | Are you entitled to the main residence exemption for Property 1 for the period beginning when it was purchased and ending when you purchased your spouse's share of the property? | Yes. | Are you entitled to the main residence exemption for Property 1 for half of the period when you and your spouse nominated different main residences? | Yes. | Are you entitled to any main residence exemption for Property 1 for the period when you nominated Property 2 as your main residence to the date of sale of the Property 1? | No. | Are you entitled to any main residence exemption for Property 2 for the period that you owned Property 2 and had nominated Property 1 as your main residence? | No. | Are you entitled to the main residence exemption for Property 2 for the period that you nominated it as your main residence? | Yes.

Relevant facts and circumstances: You and your spouse purchased Property 1 several years ago. This property is less than 2 hectares in size. You lived in Property 1 as your main residence. During this time the adjacent land was not used for income producing purposes. Some years later, you and your spouse moved to a new location and from that time Property 1 was rented out. You and your spouse then purchased Property 2. This property is less than 2 hectares in size. You did not use the adjacent land for income producing purposes. You moved into Property 2 several months after you purchased it, following renovations. Later on, your spouse transferred their ownership of Property 1 to you. From that time you were the sole owner of Property 1. You have continued to rent out Property 1 since that time. When you sell Property 1, you intend to nominate Property 1 as your main residence for a period of 6 years beginning when you rented it out. You have told us that your spouse nominated Property 1 as their main residence from the time you purchased it together until when they sold their share of the property to you. You intend to sell Property 1 within the next two years. You intend to continue to rent Property 1 until its eventual sale. In the year ended 30 June 2012 you and your spouse sold Property 2 and moved into a rental property. You nominated Property 2 as your main residence for the period beginning when you no longer nominated Property 1 as your main residence, until when Property 2 was sold. You have told us that your spouse nominated Property 2 as their main residence for the period when they sold their share of Property 1 to you, until when you both sold Property 2.


Reasons for decision: Summary: Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property. Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss. The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity. In your case, CGT event A1 will happen when you sell Property 1. CGT event A1 happened when you sold Property 2. Main residence exemption Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income. Six year absence rule Section 118-145 of the ITAA 1997 states that you may choose to continue to treat a dwelling as your main residence when you cease to live in that dwelling. However, if you use your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence while you are absent is six years. Spouses with different main residences If, during a period, a dwelling is your main residence and another dwelling is the main residence of your spouse, only one of the dwellings can be treated as the main residence of both you and your spouse for that period (section 118-170 of the ITAA 1997). Alternatively, both dwellings can be treated as main residences for the period. If this happens, the exemption is split. If your interest in the dwelling is not more than half of the total interests held by all persons in the dwelling, it is taken to be a main residence during the whole of the period. Otherwise, the dwelling is taken to be your main residence for only half of the period. | Detailed Reasoning - Application to your circumstances:: Property 1 In your case, both you and your spouse have nominated Property 1 as being your main residence for the period beginning when you purchased it, until your spouse sold their share of the property to you. Therefore, you are entitled to a full main residence exemption under section 118-110 of the ITAA 1997 on Property 1 for this period. For the period when your spouse sold their share of Property 1 to you, until when you ceased to nominate Property 1 as your main residence, you and your spouse nominated different main residences. During this time you nominated Property 1 as being your main residence. As you were the sole owner of Property 1 at this time, your ownership interest in the property at this time was more than half, therefore under section 118-170 of the ITAA 1997 you are entitled to the main residence exemption for half of this period . As you rented out Property 1, you are only entitled to apply the absence rule for a maximum of six years under section 118-145 of the ITAA 1997, which you have done. As this six year period ended several years ago, and you continue to use Property 1 as a rental property, you are not entitled to any main residence exemption from the time the 6 year period ended, until the sale of the property. Property 2 As you nominated Property 1 as being your main residence prior to the 6 year absence period ending, you are not entitled to any main residence exemption for the period beginning when Property 2 was purchased and ending when you ceased to nominate Property 1 as your main residence. Both you and your spouse have nominated Property 2 as being your main residence for the period beginning when you ceased to nominate Property 1 as your main residence and ending when you sold Property 2. Therefore, you are entitled to a full main residence exemption under section 118-110 of the ITAA 1997 on Property 2 for this period.

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