In general, there is no capital gains tax on the sale of your main residence. This can also be referred to as the ‘primary residence exemption’.
The main residence CGT exemption applies to the disposal of a dwelling owned and normally occupied as an individual’s main residence, and is set out in Subdivision 118-B ITAA 1997.
There are some qualifications:
- If the dwelling is used for earning income, the residence may only be partially exempt.
- The primary residence exemption is reserved for individuals and is not available to corporate entities or trusts, unless..
- beneficial ownership is via a home-unit company, a strata title company, or a retirement village; or
- the dwelling is the main residence of a trust beneficiary with absolute entitlement
- the home is the main residence of the beneficiary of a will
- the trust is a Special Disability Trust (enacted in 2012 to apply from 1 July 2006)
The meaning of “dwelling” is defined in Section 118-115(1) ITAA 1997 as “a unit of residential accommodation owned by the taxpayer and includes a flat, home unit, caravan, houseboat, or other mobile home, and the land immediately under the unit of accommodation.”
- Land adjacent to the home is included in the exemption to a maximum of two hectares provided it is used primarily for private or domestic purposes. Adjacent land means nearby, not necessarily joined.
- To be a main residence, TD 51 (ruling withdrawn in 2010 – but still relevant) mentions family and circumstantial factors which should be taken into account. Whether a dwelling is your main residence is a matter of fact.
- Generally only one residence can be chosen for the main residence exemption. If more than one residence qualifies as a main residence, one property is chosen at the time of lodging the tax return for the relevant year.
Note that for the main residence exemption to apply to land which has been acquired pre-CGT (September 1985) a choice is required. See TD 2017/13 – If you build a dwelling on land that you acquired before 20 September 1985 (‘pre-CGT’), are you required to make a choice under section 118-150 (1) of the Income Tax Assessment Act 1997 to get the main residence exemption?
Non-residents and the main residence exemption
A proposal originally set forth in the 2017 Budget denies foreign and temporary tax residents access to the CGT main residence exemption. The proposed measures apply from 9 May 2017.
Transitional rules extending the exemption to pre-existing properties have application until 30 June 2020.
For details of the legislation see Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019
Extensions to the main residence exemption
Before You Move In
You can choose to have a property qualify for the main residence exemption for up to four years before it actually becomes your main residence, in the period from the time the property is purchased. This extension of the exemption rules is available under Section 118-150 ITAA 1997, which allows you the time to build, repair, renovate or finish building a dwelling on land which you own.
The property must become the “main residence” as “soon as practicable” after completion (it can’t be rented out), and remain so for a minimum period of 3 months. ATO determination TD 2000/16 has more details.
Only one dwelling can be chosen as the main residence during the pre-occupation period, except for a 6-month period while changing main residences, as allowed for in Section 118-140 (see following).
Section 188-155 provides relief when an individual dies before the qualifying periods for completion or occupation can be met, (but not if the death occurs before the construction or repair work has started). The relief allows the trustee or surviving joint tenant to treat the property as a main residence for the shorter of 4 years or the time between acquisition of the property and death.
Absences, and the 6-year rule
Section 118-145 allows you to continue to treat a dwelling as your main residence for up to 6 years if it is income-producing when you move out. Each time you move back in, the main residence exemption period is re-set to 6 years from when you (again) move out.
If the dwelling is not income-producing, and you do not treat any other dwelling as your main residence (except if you are changing your main residence – see below) then there is no time limit.
The choice to nominate a main residence is made in the tax return of the year the residence is sold. If the choice is validly made, the house is free of CGT (or subject to partial exemption if applicable).
A common scenario is moving for work purposes, and renting your main residence while you are away. This allows a 6 year period in which to continue treating the first house as your main residence, re-started each time you move back in. In this scenario, if your house is sold within 6 years (or the extended 6 year periods), then it is capital gains tax free.
If the eligibility for the absence rule is lost (for example because the period of absence stretches beyond the 6 years limitation) then the cost base of the property is then taken to be the market value at the time you moved out, and CGT is apportioned between taxable and non-taxable periods.
If your first house in this scenario is not income-producing (i.e. not rented) there is no time limit for continuing to treat it as your main residence, as long as no other house is treated as your main residence.
More Than One Main Residence – Changing Residence
Another frequent scenario is buying another residence before selling your existing one. In that case, a changeover period of 6 months is allowed, during which time both residences can be treated as your main residence. You must have occupied your existing house for at least 3 months in year before selling it, and it must not have been income producing in that time.
Section 188-155 provides relief when a taxpayer dies before the qualifying periods can be met in a pre-occupancy scenario (see “Before You Move In” referred to above).
In other circumstances, section 118-195 “Dwelling acquired from a deceased estate” provides for the disregarding of most capital gains and loss events which arise from the disposal, by a deceased estate beneficiary or trustee, of a main residence, primarily within 2 years of death.
Profits or losses from the disposal of an ownership interest in a dwelling that passed to an individual beneficiary or trustee of a deceased’s estate within 2 years of death are disregarded. The Commissioner has the discretion to extend the two year period in certain circumstances. See Practical Compliance Guideline
If the dwelling was bought after CGT commenced on 20 September 1985, was the deceased’s main residence at the time of death and not income-producing, then a sale within 2 years is excluded from CGT. The time period is measured until the time the property changed ownership, not the time of a sale contract.
If the dwelling was bought by the deceased before CGT commenced on 20 September 1985, was the deceased’s main residence at the time of death and not income-producing, then a sale is excluded from CGT if, from the time of death until the sale,
- the property is the main residence of a surviving spouse,
- an individual who had a right to occupy the dwelling under the deceased’s will or
- an individual beneficiary.
Furthermore, only these CGT events are excluded: CGT events A1, B1, C1, C2, E1, E2, F2, I1, I2, K3, K4 and K6 (except one involving the forfeiting of a deposit unless the forfeiture is part of an uninterrupted sequence of transactions)
A partial exemption may apply in circumstances where the dwelling was not always the main residence of the deceased. (Section 118-200).
Partly Income-Producing Residence
In principle, an income-producing residence is not exempt from CGT. The exemption is apportioned when:
- a main residence is partly used for producing income – such as a place of business; and
- when the residence is income-producing for only part of the period of ownership.
The Government has requested the Board of Taxation undertake a review of the tax treatment of granny flat arrangements and recommend any potential changes. This is in response to concerns over the potential for capital gains tax to be incurred where there is a formal agreement for a family member to reside in the taxpayer’s home – either under the same roof or in a separately constructed dwelling. See media release here.
In some cases, the tax consequences have been a deterrent to families establishing a formal and legally enforceable family agreement, which leaves no protection of the rights of the older person if there is a breakdown in the agreement.
Residence used as a place of business
The threshold factual evidence of a residence being a place of business (as opposed to simply a place where some business is done), is fundamentally a test of whether a tax deduction for loan interest would be claimable. This transcends the kind of “business” use that, for example, the incidental use of a home office normally indicates.
If a residence is partly a place of business, then tax deductions are generally available in addition to running expenses, for occupancy costs including loan interest, rates and taxes, proportionate to business use and typically based on the floor area.
The consequence is that a proportion of the capital gain on sale of the residence will be taxable on a consistent “reasonable” basis (Refer TD 1999/66). Since 20 August 1996, the capital gain is worked out with a cost base equal to the market value at the time of first business use.
Caution – place of business claims
Clearly the use of a residence as a place of business (and to claim relevant tax deductions) should be carefully weighed up against the potential CGT consequences if/when the residence is to be sold.
Residence Rented Out
When a residence is rented out, it is fully income-producing during that time, and subject to the 6-year absence rule (see above), loses the CGT exemption based on the period of rental. (There are some offsetting tax benefits from renting out; a review of negative gearing and a calculator are here.)
If the 6 year rule is exceeded, any capital gain is determined as a ratio of the non-main residence days to total ownership days since becoming income producing, and using a cost base equal to market value on the day of first income producing use.
If the residence was partly business use before the 6 absence rule period, the business use percentage is also factored into the capital gain calculation, as if the business use continued during the absence period.
The Formulae For Apportioning Part-exempt capital gains
Putting this together the formula looks like this:
Capital Gain Amount = [net sale value – market value on day first income producing]
Ownership days = number of days since first income producing
Capital gain = [Capital Gain Amount x Non-main-residence days] ÷ Ownership days
(Assessable capital gains may be further eligible for the 50% discount entitlement. )
This page was last modified 2019-10-24