Main Residence Exemption & Capital Gains Tax

A dwelling owned and occupied by a person is generally free from capital gains tax. A dwelling is a unit of residential accommodation and includes a flat, home unit, caravan, or other mobile home. A person is taken to have acquired a dwelling if the person has beneficial ownership in the dwelling. The ATO’s view is that if the dwelling is owned by an individual trustee of a trust or a company or corporate trustee, the main residence exemption does not apply. Capital gains tax (CGT) may apply where a dwelling is transferred from an entity to a spouse when a marriage breakdown occurs.

Choice of main residence

If there are two or more properties purchased, these could qualify as a taxpayer’s main residence, the taxpayer must select which property is to be treated as his or her main residence for capital gains tax (CGT) purposes. The choice is made when the taxpayer lodges their tax return for the income year in which the residence was sold.

Changing main residences

Generally, a taxpayer can only apply the main residence exemption to one dwelling at a time. There are situations where a taxpayer acquires a new dwelling that is to become his or her main residence before disposing of an existing main residence. Both dwellings will be treated as the taxpayer’s main residence for whichever of the following is the shortest in time:

–       Six month period immediately before the disposal of the old dwelling or

–       The period between the acquisition of the new dwelling and the disposal of the old dwelling

This only applies if the old dwelling was the taxpayer’s main residence for a continuous period of at least 3 months in the 12 months before it is disposed of and the old dwelling was not used for gaining or producing assessable income in any part of that 12 month period when it was not the taxpayer’s main residence. Where these exemptions cannot be satisfied pro-rata exemption is available.

Absences

A dwelling cannot be the taxpayer’s main residence if they stop living in it, however main residence exemption is available despite a temporary absence. This exemption will only be available where no other dwelling is treated as the taxpayer’s main residence during the period of absence. The main conditions are:

–       The dwelling is not used to produce assessable income for more than 6 years

–       The taxpayer makes an election to treat the dwelling as their main residence

Partial exemption

A partial exemption may be available if the dwelling was used to produce assessable income or if it was the main residence of the taxpayer only for part of the period they owned it. The partial exemption is based on the number of days the dwelling was used as the taxpayer’s main residence.

Use for income producing purposes

Partial capital gains tax (CGT) exemption applies where the property was partially used as main residence and partially for income producing purposes. For example the taxpayer has been using the property partially as an office and the taxpayer has been claiming interest deductions on money borrowed to acquire the dwelling. The proportion is based on the floor area of the home and it is subject to capital gains tax (CGT) when the dwelling is sold.