For many taxpayers, claiming a main residence exemption from capital gains tax (CGT) is quite straightforward. This is where they are Australian tax residents, purchase their home on a normal sized block, move straight in and have the one property as their main residence until they sell it. Small variations to this situation however may require the making of CGT elections and detailed tax calculations.
To meet the requirements to claim the main residence exemption for CGT purposes, you need to satisfy a number of criteria. If any of these criteria are not met, then the main residence exemption may either be reduced or not available.
Standard criteria
• The property was purchased as a capital asset (not as part of a business or for resale at a profit).
• You moved in as soon as practical after settlement.
• During your period of ownership, you have not had another main residence.
• The property has not been rented or used for any other income producing purposes.
• The land area of the property is less than 2 hectares.
• The property must include a dwelling at the time of disposal.
• You are an Australian tax resident at the time of sale or a foreign tax resident that satisfies the “life events test”.
There are rules that extend the main residence exemption:
• Changing main residence – both properties may be treated as a taxpayer’s main residence for up to 6 months, subject to meeting other conditions.
• A property stops being a main residence, but another main residence is not taken – where the property is used for income producing purposes – e.g. rental income, this extension is limited to a 6 year period.
• Building a main residence – main residence exemption applies up to 4 years before the dwelling became the main residence, provided the other criteria noted above are met. The Australian Taxation Office (ATO) may extend the 4 year period on application.
• Main residence accidently destroyed or compulsorily acquired, provided the other criteria noted above are met.
• Replacement dwellings where the original dwelling is destroyed or compulsorily acquired.
There are rules that limit the main residence exemption so that it does not apply to:
• Disposal of adjacent land or related structure that are disposed of separately to the main residence.
• Spouses with different residences – only one of the dwellings may be treated as a main residence for CGT exemption purposes.
• Taxpayer and (economically) dependent with different residences – only one of the dwellings may be treated as a main residence for CGT exemption purposes.
• Marriage or relationship breakdown roll-overs – eligibility for the main residence exemption is based on the way in which both the transferor and transferee spouses used the dwelling during their combined period of ownership.
• A property transferred from company or trustee after marriage or relationship breakdown – cannot treat it as a main residence during the period it was owned by the company or trustee.
A partial main residence exemption may be available where:
• A property was a main residence for part of the ownership period.
• The main residence used for income-producing purposes.
There are a number of provisions relating to property acquired from deceased estates. A main residence exemption may be available where the property was the deceased’s main residence and is disposed of within 2 years of the date of death, provided the other criteria noted above are met. ATO may extend the 2 year period on application.
There are a number of elections required to be made when calculating a capital gain or loss relating to a property – e.g. which of 2 properties do you use for the main residence exemption. These elections are evidenced by the CGT calculation and the disclosure of the capital gain or loss in the income tax return for the year in which the property disposal occurred. Elections made often affect future CGT calculations related to other properties owned at the same time. It is often useful to model the effect of these elections to ensure that the applicable election options and exemptions claimed are exercised in the most tax effective manner.
The application of the main residence exemption is sometimes far from simple and professional advice should be sought to confirm that your circumstances satisfy the CGT exemption or partial exemption criteria.
This article contains general information that should not be considered as advice. A small change in a factual situation can significantly alter the tax result arising from a transaction. This firm accepts no responsibility or any form of liability from reliance upon or use of its contents without further consultation with us.
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