Private ruling: capital gains tax - main residence exemption - absence choice - home first used to produce income
Published: February 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1:  | A1:  | Q2:  | A2: 

Relevant facts and circumstances: You and your spouse acquired a vacant block of land after 20 September 1985. Commencement of the construction of a dwelling, Dwelling A, on the block of land occurred prior to settlement occurring, with completion occurring after a number of months. You made the choice for the main residence exemption to apply to the vacant block of land while the Dwelling A was being constructed. You moved into Dwelling A days after construction had been completed. You lived in Dwelling A for a number of years until you and your spouse moved overseas. Dwelling A was rented out from the date you move out and you and your spouse made the absence choice in relation to the dwelling. Dwelling A has been continuously rented out with the exception of a few months during which you continued claiming deductions for the dwelling. You bought your spouse's ownership interest in Dwelling A after a number of years resulting in the title being solely in your name. You and your spouse purchased another dwelling, Dwelling B, after a period of time. You and your spouse returned to Australia and moved in with your parents.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 112-20 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 118-192

Reasons for decision: Detailed Reasoning - Main residence exemption: Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence when the following conditions have been met: § The dwelling must have been your main residence for the whole period you owned it; § You must not have used the dwelling to produce assessable income; and § Any land on which the dwelling is situated must be two hectares or less. If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time. In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it. The absence provision allows a dwelling that has qualified as the taxpayer's main residence to continue to be treated as the taxpayer's main residence during a period of absence from the dwelling. Where the concession is chosen, a dwelling can be treated as the taxpayer's main residence for days numbering up to six years of absence when the dwelling is being used to produce assessable income. The period starts from the date the taxpayer moves out of the dwelling and will include any period during which the property is left vacant while it is advertised for tenants. If you rent it for days totalling more than the six year period you will only be entitled to a partial exemption. However, if you do not use the dwelling for income producing purposes, then you can continue to claim to treat the property as your main residence indefinitely. Once the absence choice has been made, no other dwelling can be treated as your main residence. In your case, you and your spouse wife jointly resided in Dwelling B until you moved overseas and the dwelling was rented out. You and your spouse made the absence choice in relation to the dwelling. This choice meant that Dwelling A is viewed as your main residence for a number of days up to six years in total from the date you moved out. As you have continued to rent out the dwelling after the end of the six year period the dwelling ceased to be your main residence for capital gains tax (CGT) purposes and you will not be eligible for a full exemption when the dwelling is disposed of in the future. | Detailed Reasoning - Acquisition of your spouse's 50% ownership interest in the property: In your case, you purchased your spouse's ownership interest in Dwelling A, with the title being transferred into your name. As a result, you have two interests in Dwelling A, being your original 50% ownership interest in the dwelling and the 50% ownership interest you acquired from your spouse. The application of the CGT provisions to the two interests are as follows: Original 50% interest If you start using your main residence to produce income for the first time after 20 August 1996, a special rule known as the home first used to produce income rule affects the way you calculate your capital gain or capital loss. In this case, you are taken to have acquired your home at its market value at the time it is first used to produce income if all of the following apply: § You acquired your dwelling on or after 20 September 1985; § You first used the dwelling to produce income after 20 August 1996; § When a CGT event occurs, you would only obtain a part exemption because your dwelling was used to produce assessable income during the period you owned it; and § You would be entitled to a full exemption if the CGT event happened to your dwelling immediately before you first used it to produce income. If all of the above conditions apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice. In your situation, you made the choice to treat the vacant land as your main residence from the time you acquired the land until the time you moved into the dwelling. You then resided in the dwelling for a number of years until you and your spouse moved overseas. Dwelling A was rented out from the date you moved out and you and your spouse made the absence choice, with the period covered by the absence choice ending after a total number of days equal to a six year period had transpired. . As you would only be eligible for a partial main residence exemption if you disposed of Dwelling A in the future, but would have been entitled to a full exemption if a CGT event had occurred to Dwelling A just prior to the transpiring of the six year period covered by the absence choice, the home first used to produce income rule will apply to your situation in relation to your original 50% interest in Dwelling A. The first element of the cost base of your original 50% ownership interest in Dwelling A used when calculating the capital gain or capital loss made on the disposal of your original interest will be the market value of the 50% interest in Dwelling A on the date you moved out of the dwelling. 50% interest acquired from your spouse In your situation, Dwelling A was rented out and you and your spouse made the absence choice in relation to the dwelling. Dwelling A has been continuously rented out, with the exception of a period of a few months during which you continued claiming deductions for the dwelling. You bought your spouse's ownership interest in Dwelling A, resulting in the title being solely in your name. The period covered by the absence choice ended after a total number of days equal to the six year period had transpired. As the period covered by the absence choice will not cover your entire ownership period of the 50% interest in Dwelling A you acquired from your spouse, you will only be eligible for a partial exemption in relation to that interest when you eventually dispose of the dwelling. The calculation in this type of situation is as follows: Capital gain or Capital Loss Amount x __ Non main residence days ___ Total days in ownership period In your case, the number of non main residence days starts from the date the absence choice period ends. This is the date that incorporates the six year absence rule from the date you first rented your dwelling. Note: Where a taxpayer acquires a CGT asset from another entity, but does not deal with that entity at arm's length in relation to the acquisition, the first element of the cost base and reduced cost base of the asset is its market value at the acquisition time.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: capital gains tax - main residence exemption - absence choice - home first used to produce income: Question 1: Will dwelling A continue to be viewed as your main residence for capital gains tax purposes indefinitely? | Question 2: Does the acquisition of your spouse's ownership interest in the dwelling impact on the capital gains tax implications when you disposal of the dwelling?