It is commonly understood that the sale of a taxpayer’s private home is exempt from CGT … but this is not always the case. So what are the circumstances in which the sale of a property in which the taxpayer had lived may give rise to a tax liability?
The main residence exemption (MRE) in Subdiv 118-B of the ITAA 1997 provides a full or partial exemption in respect of a capital gain or loss that a taxpayer makes from a CGT event (e.g. a disposal) happening to their ‘dwelling’.
The MRE only applies to an individual taxpayer.
A ‘dwelling’ is defined as including a unit of accommodation that is:
The dwelling also includes any land immediately under the unit of accommodation.
If the taxpayer has lived in their dwelling for the entire period of ownership and has not used the property for income-producing purposes then the taxpayer will be eligible for a full tax exemption.
However the exemption is reduced in some circumstances. The calculation of a partially taxable gain may also be adjusted.
A partial exemption applies if the dwelling was used for the purpose of producing assessable income during all or part of the period of the taxpayer’s ownership.
This may include:
The reduction in the MRE takes into account the amount of time that the dwelling was used for income-producing purposes as well as the proportion of the property (which may be measured in different ways, e.g. by area) which was used for those purposes.
The extent to which the taxpayer can access the MRE depends on the proportion of their period of ownership in which the dwelling is the taxpayer’s ‘main residence’.
The tax legislation does not define ‘main residence’ but the ATO will consider a dwelling to be the taxpayer’s main residence if:
The length of time the taxpayer stays in the dwelling and whether they intend to occupy it as their home may also be relevant.
A taxpayer’s home will be their main residence from the start of their ownership period, provided they move in ‘as soon as practicable’.
If there is a delay moving in because of illness or other unforeseen circumstances — the dwelling will still qualify as a main residence, provided the taxpayer moves in as soon s the cause of the delay is remove (e.g. when they recover from the illness).
If the taxpayer cannot move in because the property is being rented to someone else — the property does not become the taxpayer’s main residence until they move in.
There are specific situations in which a taxpayer may treat a dwelling as their main residence for a period even if they were not living there during that period — see below for a list — so the taxpayer may be able to access a full exemption, or a greater partial exemption., than would otherwise be the case.
Generally the maximum area of land adjacent to the dwelling covered by the MRE rules is two hectares, less the area of the land immediately under the dwelling. Land outside this area is not eligible for an exemption even if it is wholly used for private purposes.
The MRE legislation contains special rules under which a taxpayer may choose to treat a dwelling as their main residence for a certain period of time even if they are not living in it during that time:
In most (but not all) cases, where the taxpayer treats a particular dwelling as their main residence during a period of time, they cannot also treat another dwelling as a main residence during that same period of time.
If the MRE applies only partially or not at all, a taxable capital gain will need to be calculated. There are some situations in which the proceeds or the cost base requires adjustment.
Generally, the capital proceeds from a CGT event are the sum of:
A taxpayer may wish to transfer their interest in their family home to an adult child for either no proceeds, or less than market value proceeds in a non-arm’s length arrangement. A market value substitute rule ensures that in calculating the capital gain or loss, the capital proceeds are taken to be equal to the market value of the dwelling at the time of the disposal.
The cost base of the dwelling comprises five elements:
Certain amounts are excluded from being included in cost base, including amounts which the taxpayer could have deducted (e.g. capital works deductions during a period when the property was rented out).
The first element of the cost base and reduced cost base of the dwelling is its market value at the time of acquisition if:
Some or all of the above may apply where for example the taxpayer had acquired the property from their parents at non-arm’s length terms.
Where the dwelling has been used for income-producing purposes, the total cost base is treated as the market value of the dwelling at the first time it was used for those purposes.
Where the taxpayer acquired the dwelling, or a part interest in the dwelling, in a marriage breakdown that was subject to the marriage breakdown CGT roll-over, the first element of the cost base is equal to the total cost base in the hands of the transferor spouse.
Where the property was inherited through a deceased estate:
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