We owned a property in NSW from 1/5/2000 which we lived in for 2 years. We then moved around with work and rented various properties in NSW and QLD. The original property was never rented out and was intended to be our ‘main residence for capital gains tax exemption’.
We then bought another property in Queensland and moved into it while waiting for our apartment in QLD to be completed. We opted to still maintain the vacant, but furnished, home in NSW as our ‘main residence for tax exemption’.
In August 2006, we exchanged contracts to sell the home in NSW, however, settlement did not occur until April 2007. The house was still empty but furnished until settlement occurred.
In March 2007, we moved again with work back to NSW and into a rental property. Tenants immediately moved into our house in Queensland.
We have since sold the house in Queensland and incurred a substantial loss which we would like to offset against a capital gain.
My question is, when contracts exchanged in Aug ’06 to sell our home in NSW, did the property we were living in in QLD automatically then become our ‘principal place of residence’ for tax purposes or can we still claim the NSW property as our principal place of residence up to the date of settlement – April 07 (ie the full period of ownership).
My fear is that if the QLD property automatically became our principal place of residence for tax purposes in Aug 06, then we cannot claim the full capital loss we incurred when it was sold as our cost base would need to be reset from the time the property was tenanted and we also wouldn’t be able to claim any of the original purchase costs.
What are your thoughts?
Excellent question, I can see you already have a good understanding of the issues
Let’s make sure we understand each other first. There are three properties to be considered here:
1) Original home in NSW purchase 1-5-00 lived in till 2002 never rented, CGT event Aug 06 settlement April 07
2) House in Qld live in from purchase till March 2007 then tenanted then sold in 2009
3) Unit in Qld which appears to have no affect
Section 118-192 states that for the reset of the cost base rule to apply it must have qualified for your main residence exemption over the property for the whole period of ownership. So as it was not covered by your main residence exemption at the start of your ownership period the reset rule cannot apply
The above means you can claim the full loss but just for the sake of fully answering your question and to show you why the loss does not even have to be apportioned I add the following.
I have heard the ATO argue that if you only have one house and you are living there you cannot say it is not covered by your main residence exemption as the choice is only allowed if you have two. I think this is a poor argument but nevertheless once you had sold NSW you were not actually living in Qld so this is not a problem. The absence rule, section 118-145 gives you a choice to cover the Qld property after you move out but does not force you to. This section also allows you to cover the NSW property with your main residence exemption for an indefinite period of time after you move out because it was not earning income in your absence.
. Your main residence exemption period refers to ownership period rather than when the CGT event happens on signing the contract, accordingly you would need to cover the NSW property up to settlement date.
SECTION 118-192 Special rule for first use to produce income ITAA 36
There is a special rule if:
(a) you would get only a partial exemption under this Subdivision for a *CGT event happening in relation to a *dwelling or your *ownership interest in it because the dwelling was used for the *purpose of producing assessable income during your *ownership period; and
(aa) that use occurred for the first time after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and View history reference
(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.
View history note
Hide history note
118-192(2) View history reference
You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its *market value at that time.
If your *ownership interest in the *dwelling *passed to you as a beneficiary in a deceased’s estate, or you owned it as the trustee of a deceased estate and the *CGT event did not happen within 2 years of the deceased’s death, you apply this Subdivision as if:
(a) you had *acquired the interest as an individual and not as a beneficiary or trustee of a deceased estate; and
(b) for applying the formula in section 118-185, your non-main residence days were the number of days in your *ownership period when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.
SECTION 118-145 Absences ITAA 36
If a *dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.
If you use the part of the *dwelling that was your main residence for the *purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.
If you do not use the *dwelling for that purpose, you can treat it as your main residence under this section indefinitely.
If you make the choice, you cannot treat any other *dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies.
You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out), at the end of which you sell the house.
You have not treated any other dwelling as your main residence during your absences.
You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years.
You can make this choice when preparing your income tax return for the income year in which you sold the house