Private ruling: Capital gains tax - main residence - two dwellings
Published: November 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will you be liable for capital gains tax (CGT) on the disposal of your interest in a dwelling which was your main residence and is used to produce income for less than six years? | A1: No.

Relevant facts and circumstances: You and your spouse currently own a property as joint tenants in a half share as tenants in common with your parents. The property is one title with two dwellings. You and your spouse reside in one dwelling (dwelling A) as your main residence. Your parents reside in the other dwelling (dwelling B) as their main residence. You and your spouse will purchase another dwelling closer to the city. You and your spouse will rent out dwelling A for a period of less than six years. You will elect to treat dwelling A as your main residence for your entire ownership period. The property will be disposed of.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 108-7 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 118-145

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. CGT is the tax you pay when a CGT event happens to a CGT asset, such as land. The most common CGT event is CGT event A1, which occurs when you dispose of an asset, or interest in an asset to another party. | Detailed Reasoning - Tenants in common: Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common. Tenancy in common is a type of co-ownership where two or more persons own interests in the same piece of property. The tenants in common hold undivided shares, possessing the property in common and without exclusive possession of any part of it. Taxation Ruling IT 2485 states that where a dwelling is not the sole or principal residence of all joint owners, the exemption provided on disposal (main residence exemption) is available only to the joint owner or each joint owner who occupied the dwelling as his or her sole or principal residence in respect of his or her share in the dwelling. Generally, if an individual owns more than one dwelling during a particular period, only one dwelling can be their main residence at any one time. The main residence exemption also applies to the surrounding total land area on which the dwelling stands on up to two hectares which is used primarily for private and domestic purposes in association with the dwelling. | Detailed Reasoning - Continuing main residence status after dwelling ceases to be your main residence: In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence. This choice needs to be made only for the income year that the CGT event happens to the dwelling. If you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you cease living in it. If you do use it to produce income, you can choose to treat it as your main residence for up to six years after you stop living in it. If you are absent more than once during the period you own the dwelling, the six year maximum period that you can treat it as your main residence while you use it to produce income applies separately to each period of absence. If you make this choice, you cannot treat any other dwelling as your main residence for that period. The only exception to this is where you are changing main residences both dwellings are treated as your main residence for up six months. | Detailed Reasoning - How it applies to your situation: In your situation, as joint tenants, you and your spouse occupying dwelling A as your main residence you will benefit from the main residence exemption in respect of your interests in this dwelling upon a CGT event occurring. If you and your spouse use dwelling A to produce income for less than six year you will be entitled to the full main residence exemption on your interests. If dwelling A is used to produce income for more than six years you and your spouse will be entitled to a partial main residence exemption. Any other joint tenants not occupying that dwelling as their main residence will be subject to CGT on their interest in dwelling A.