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Capital Gains Tax –
Main Residence Exemption
David Hawkes
The material published in this paper is published on the basis that the opinions expressed are not to be registered as the
official opinions of the Taxation Institute of Australia. The material should not be used or treated as professional advice and
readers should rely on their own enquiries in making any decisions concerning their own interests.
PricewaterhouseCoopers
Main Residence Exemption
Full Exemption (s118-110)
Relevant CGT events
(s118-110)
The capital gain/loss that an individual makes from a CGT
event in relation to a CGT asset that is a dwelling or an
ownership interest in it is disregarded if:
A1 – Disposal of a CGT asset (s104-10);
ƒ the dwelling was their main residence throughout the
ownership period
ƒ the dwelling was not used for income producing purposes –
s118-190; and
ƒ the land the dwelling is situated on is no more than 2
hectares – s118-120.
Main Residence Exemption
Key Concepts
E1 – Creating a trust over a CGT asset (s104-55);
E2 – Transferring a CGT asset to a trust (s104-60);
I1 – Individual or company stops being a resident (s 104-160);
I2 – Trust stops being a resident trust (s104-170);
K3 – Asset passing to a tax-advantaged entity (s104-220).
Also – B1, C1, C2, F2, K4 and K6
Main Residence Exemption
Individual (s995-1)
¾ Individual (s995-1)
ƒ Means a natural person (s995-1);
¾ Dwelling (s118-115)
ƒ Excludes a family company or a family trusts (except
where the trust is a bare trust) – TD 58;
¾ Main Residence (TD 51)
¾ Ownership period (s118-125)
¾ Ownership Interest (s118-130)
ƒ Separate provisions apply to beneficiaries or trustees of
deceased estates (s118-110(1)(c)).
1
Main Residence Exemption
Dwelling (s118-115)
Main Residence Exemption
ƒ Building or part of a building consisting mainly of
residential accommodation (eg house, apartment or
flat);
¾ Not a defined term
ƒ The land immediately under the accommodation;
ƒ Caravan, houseboat or other mobile home.
Main Residence Exemption
Ownership Period
A period commencing:
¾ on or after 20 September 1985;
¾ when ownership interest in the dwelling or land on
which the dwelling is later built commences.
Main Residence
¾ Factors to consider – TD 51
– the length of time the taxpayer has lived in the dwelling;
– the place of residence of the taxpayer’s family;
– whether the taxpayer has moved any personal
belongings into the dwelling;
– the address to which the taxpayer has mail delivered;
– the taxpayer’s address on the Electoral Roll;
– the connection of services such as telephone, gas and
electricity ; and
– the taxpayer’s intention in occupying the dwelling.
Main Residence Exemption
Ownership Interest (s118-130)
¾ Ownership interest commences at the time an
individual obtains legal ownership (or at the time
they have a right o occupy the dwelling if that is an
earlier time) - s118-130(2).
¾ Ownership interest ceases when legal ownership
ends - s118-130(3).
¾ Accordingly, given that a taxpayer's legal ownership
in a dwelling passes at the date of settlement, the
taxpayer's ownership interest in a dwelling also
starts and ends at settlement.
Main Residence Exemption
Main Residence Exemption
Land Adjacent to the Dwelling
Can only have one main residence
Exempt from CGT to the extent that:
¾ it is used primarily for private and domestic
purposes in association with the dwelling; and
¾ the land is 2 hectares or less – can choose to
exempt any area of the land (TD 1999/67).
Can only have one main residence at any one time
unless changing main residence (s118-140). Both
residences are exempt if the old residence:
ƒ was the main residence for a continuous period of at least
3 months in the last 12 months;
ƒ was not used for the purpose of producing assessable income
during that 12 month period when it was not the main residence;
and
ƒ is disposed within 6 months of acquiring the new one. Otherwise
the exemption for the old residence applies only for the last 6
months.
2
Main Residence Exemption
Main Residence Exemption
Absence rule (s118-145)
Partial exemption (s118-185)
¾ If an individual is absent from their main residence they
can still treat it as their main residence where:
ƒ it is used for an income producing purpose – up to 6
years (the 6 year period commences again each time
the dwelling becomes and ceases to be the main
residence); and
ƒ it is not used for that purpose – indefinitely.
¾ If you have 2 properties which can qualify as your main
residence then you can choose which property is
treated as your main residence. The choice is made in
the year of disposal, with the benefit of hindsight.
¾ Applies if the dwelling was the individual’s main
residence for only part of the ownership period;
¾ The capital gain/loss is calculated as follows:
Total CG or CL x
Non-main residence days
Days in the ownership period
¾ You should consider what can be included in the cost
base of the dwelling – s110-25(4) if purchased after 20
August 1991.
Main Residence Exemption
Main Residence Exemption
Market value rule (s118-192)
Market value rule (s118-192)
¾ Conditions (s118-192):
• would only get a partial exemption for a CGT event
happening in relation to a dwelling because dwelling
was used for the purpose of producing assessable
income during the ownership period, and
¾ Applies automatically if conditions are satisfied ie not
by choice.
¾ Effect of MV rule:
• Deemed to acquire the dwelling for market value at the
time the dwelling was first used for income producing
purposes.
• that use occurred after 20 August 1996, and
• would have got full exemption if the CGT event
happened just before the first time the property was
used to produce assessable income.
Main Residence Exemption
Main Residence Exemption
Interaction between rules
CGT calculation
Interaction between
¾ Calculate Capital proceeds
¾ Absence rule (s118-145)
¾ Partial exemption (s118-185)
¾ Market value (s118-192)
•
Usually, the amount of money and/or market value of any
property received or receivable by the taxpayer in respect
of the CGT event happening
¾ Calculate Cost Base (original cost or market value as per
s118-192) plus adjustments
3
Main Residence Exemption
CGT calculation
Adjustments to cost base include: (Div 110)
1. Incidental costs incurred to acquire the CGT asset or that relate
to the CGT event;
2. Non-capital costs of ownership – only relevant if asset was
acquired after 20 August 1991;
3. Capital expenditure incurred to enhance value of asset, reflected
in state of asset at the time of the CGT event .i.e. disposal; and
Case Study 1
• On 30 June 1992, Theodore paid $200,000 for a house
that was his main residence until 30 June 1997 at which
time it had a market value of $350,000. Theodore then
rented out the dwelling until it was sold for $700,000 on 30
June 2006 i.e. 9 years after its first income producing use.
Theodore has elected for the s118-145 six year extension
to main residence exemption to apply.
• Calculate his capital gain for the 2006 year.
4. Capital expenditure incurred in establishing, preserving or
defending the taxpayer’s title to, or right over, the asset.
Case Study 1
Case Study 1
1. Calculate the capital gain (CG) using a stepped up cost
base per s118-192 (ie $350,000 at 30 June 1997)
2. Apportion the capital gain using the rule in s118-185 i.e.
• CG
X
Non main residence days
•
Days in your ownership period
• ($700k - $350k) X
1,096
•
Days in your ownership period
• The days in ownership period are calculated from the
deemed acquisition date i.e. when the dwelling first
became income producing. Accordingly, this will be the
period of 9 years (3,287 days) from 1 July 1997 till 1 July
2006.
• ($700,000 - $350,000)
X
1,096
3,287
• Capital Gain
=
$116,702
Main Residence
Exemption - Other Issues
Main Residence
Exemption - Other Issues
FAMILY SITUATIONS
ƒ marriage breakdown (s118-180);
ƒ dependent child with different main residence (s118-175);
ƒ spouse having a different main residence (s118-170):
DWELLINGS ACQUIRED FROM DECEASED ESTATES
BUILDINGS, REPAIRS, RENOVATIONS
Land can be treated as a main residence for up to
4 years if an individual:
ƒ builds a dwelling on the land;
ƒ repairs or renovates an existing dwelling on the land; or
ƒ The basic rule regarding main residence exemption does not
apply (s118-110(1)(c));
ƒ finishes a partially constructed dwelling on the land.
ƒ Full exemption from CGT may apply where a dwelling
passes to a beneficiary or a trustee of a deceased estate
(s118-195);
ƒ moves into the dwelling as soon as practicable; and
and
ƒ continues to use the dwelling as their main residence for at least
3 months.
4
CGT – Main Residence – TIA briefing – 27 March 2007
Case Study 2
Calculate the amount of gain that is taxable on Ian’s Sydney home based on
the facts below and assuming:
Ian chooses to treat his Sydney home as his main residence for the
period after he ceased living in it
Ian bought his home for 100,000, sold it for $500,000. He also added a
rumpus room in the 1991 which cost him $5,000.
The market value of the property on 1 January 1992 was $120,000 and
on 1 February 1997 was $300,000.
1 July 1990
Ian bought a home in Sydney and used it as his main
residence.
1 January 1992
Ian was posted to Brisbane and bought another home there.
1 January 1992 to
31 December 1996
Ian rented out his Sydney home during the period he was
posted to Brisbane.
31 December 1996
Ian sold his Brisbane home and the tenant in his Sydney
home left. Ian moved back into his Sydney home
1 February 1997
Ian was posted from Sydney to Melbourne and bought a
home in Melbourne. Ian rented out his Sydney home again
31 January 2004
Ian sold his Sydney home