Private ruling: Capital gains tax and the absence rule
Published: August 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Are you able to apply the absence rule to your property and get a full main residence exemption? | Yes.

Relevant facts and circumstances: You purchased a residential property in XXXX and lived in it as your main residence for over a year. You rented the property out for less than three years. You sold the property after owning it for less than six years. The property was less than two hectares. You elect to treat the property as your main residence for the whole of your ownership period.

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

Reasons for decision: Detailed Reasoning - Main residence exemption: The main residence exemption under subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) may allow a taxpayer to disregard all or part of any capital gain or capital loss they made from a capital gains tax (CGT) event that happens to their ownership interest in a dwelling where the dwelling was their main residence. The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayers main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person. However, subject to the absence rule, a taxpayer will only get a partial exemption for a CGT event that happens in relation to their ownership interest in a property if the dwelling was their main residence for only part of their ownership period. | Detailed Reasoning - The absence rule: The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence. This choice needs to be made only for the income year that the CGT event happens to the dwelling for example, the year that a taxpayer enters into a contract to sell it. If a taxpayer owns both a dwelling that they can choose to treat as their main residence after they no longer live in it, and a dwelling they actually lived in during that period of time then they make the choice for the income year they enter into the contract to sell the first of those two dwellings. If a taxpayer makes this choice, they cannot treat any other dwelling as their main residence for that period. | Detailed Reasoning - Dwelling used to produce income: If a taxpayer does not use their dwelling to produce income, for example, it is left vacant or used as a holiday home then they can treat the dwelling as their main residence for an unlimited period after they stop living in it. If a taxpayer does use their dwelling to produce income, for example, they rent it out or it is available for rent, they can choose to treat it as their main residence for up to six years after they stop living in it. You purchased the property in XXXX. You lived in it for over year and then rented it out for less than three years before selling it. You did not have another main residence for the period the property was rented out. You are therefore able to apply the absence rule and are entitled to a full main residence exemption on the property.