Private ruling: CGT - Main Residence Exemption
Published: February 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will you be able to claim the main residence exemption under the changing main residences rules which extend the main residence exemption? | A1: No. | Q2: Will you be able to claim the main residence exemption under the absences rules which allow for an election of main residence? | A2: Yes. | Q3: Will you be liable for Capital Gains Tax on the disposal of the first property? | A3: No.

Relevant facts and circumstances: · Your first property was used as your principal place of residence. · You purchased and moved into a second property which has been used as your principal place of residence since. · The second property became your principal place of residence when it was first practicable to do so. · The first property was unoccupied for a period and then rented until sold. · You elected to treat your first property as your main residence until the time you sold it.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-140 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-185 Further issues for you to consider | Nil. | Anti-avoidance rules | Nil.

Reasons for decision: Summary: You will be able to treat your first property as your main residence and disregard any capital gain made from its sale. Capital gains tax will be payable for the gains on any future sale of your second property that is not covered by the partial main residence exemption. | Detailed Reasoning - Main residence exemption: A capital gain or loss from a dwelling is ignored for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayer's 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 under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997). In your case, as the first dwelling was not your main residence throughout the entire ownership period of the property, section 118-110 of the ITAA 1997 does not apply to your circumstances. | Detailed Reasoning - Rules extending main residence exemption - changing main residences: If a taxpayer acquires a dwelling that is to become the taxpayers' main residence and the taxpayer still owns an existing main residence, both dwellings are treated as the taxpayer's main residence for up to six months under section 118-140 of the ITAA 1997. However, this rule only applies if the taxpayer's existing main residence was the taxpayer's main residence for a continuous period of at least three months in the twelve months before it was disposed of and it was not used for income-producing purposes in any part of that twelve month period when it was not the taxpayer's main residence. In your case, you owned both homes for a period of greater than six months and the first home was also used for income-producing purposes in the twelve month period prior to the sale of the property. Therefore, section 118-140 of the ITAA 1997 does not apply to your circumstances. | Detailed Reasoning - Rules extending main residence exemption - absences: If a taxpayer's main residence ceases to be their main residence, they may choose to continue to treat it as their main residence under section 118-145 of the ITAA 1997. This treatment can apply indefinitely unless part of the residence is used to produce assessable income, in which case the maximum period it can be treated as main residence for is 6 years. In your case, you have elected to continue to treat your first property as your main residence. This means that you will not be liable for capital gains tax on the capital gain made from the sale of this property. However, if in the future you sell your second property, that is now your main residence, you will be liable to pay tax on a portion of that capital gain for the time you have not been treating it as your main residence. | Detailed Reasoning - Partial main residence exemption: Subsection 118-185(1) of the ITAA 1997 explains that you get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if: a) you are an individual; and b) the dwelling was your main residence for part only of your ownership period; and c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. Subsection 118-185(2) provides that you calculate your capital gain or loss using the formula: Capital Gain or Loss amount × Non-main residence days Days in your ownership period Accordingly, if you sell your second property you will only be entitled to a partial main residence exemption for the period from when the dwelling was first used as your main residence (your principal place of residence) until the time you cease using it as your main residence. | Detailed Reasoning - Example:: Lisa acquired a dwelling on 20 October 2006 which she let out to tenants until 21 October 2009, from which date she used the dwelling as her main residence. Lisa eventually sold the dwelling on 8 September 2011 and made a capital gain of $40,000, calculated without regard to the exemption provisions. The capital gain is reduced pro-rata by reference to the period Lisa used the dwelling as her main residence. The reduced capital gain is: $40,000 × 1,098 (number of days from 20/10/2006 to 21/10/2009) 1,785 (number of days of Lisa's ownership) = $24,605