Ask Ban Tacs Question
I originally sent in the below question back in September 2020, which you responded to – thank you.
However, another part of the story has revealed itself – see bottom of original question:-
My client inherited a beach house in 1975.
This house was his main residence until 1982 at which time he and his new wife bought a bigger city home together.
They kept the beach house – it was never rented out ever – it has only ever been for private family use.
In 2012, on advice from his lawyer, my client transferred the beach house title into his wife’s name, to protect the asset as well as the main residence in the city.
In 2018 my client and his wife separated and my client moved back into the beach house permanently.
In 2019 my client was awarded the beach house by court order during his divorce.
He has sold the beach house in 2020. Will he have capital gains tax to pay on the period the beach house was in his wife’s name? Or, because it is a ‘former dwelling’ can the former dwelling exemption apply?
See the response to the original question, CGT on Holiday House Received on Divorce Settlement that Becomes a Home.
—————————————————————————————
My client also transferred the city house title (main residence) to his wife’s name in 2012 (again upon solicitors advice).
Therefore, my client protests that as he didn’t actually own any other property or main residence from 2012 until the divorce settlement in 2019, he should be able to claim 100% main residence exemption on the capital gain from the sale of the beach house.
This isn’t correct, is it?
Answer
I feel for you, hard to deliver an unfair irrational result. I can’t see how a former dwelling before 2012 can cut it but is there anyway that after 2012 he actually lived there as his home? Maybe to escape domestic disputes for a while? ?
He is only going to get half a main residence exemption to play with while he was a member of a couple but this has got me thinking. It is up to him where he puts half his main residence exemption providing he has lived there and the property is owned by him or his spouse. So what is to stop him putting it on the beach house from 2012? Is there any evidence he can argue that he did actually live there at some time after the change of ownership? If so maybe we can cover half of the gain there instead of the city house. So what we are effectively saying is during that time 2012 to 2019 when it came back into his name it is covered by his main residence exemption because he has a right to choose to cover his spouse’s property in accordance with 118-170. Then we are saying when section 118-178 says that during that time it is treated as being used as how his wife used it that is still ok. Of course this all turns on whether he can say he actually had that address on his license, lived there, personal effects etc after the transfer in 2012, note 118-145 (6 year rule) will allow him to continue to cover it with his main residence exemption indefinitely after he moves out if it is not earning income. So let’s have a look at the pieces of legislation:
Spouses with different main residences
SECTION 118-170 Spouse having different main residence
118-170(1)
If, during a period, a *dwelling is your main residence and another *dwelling is the main residence of your *spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:
(a) choose one of the dwellings as the main residence of both of you for the period; or
(b) nominate the different dwellings as your main residences for the period.
118-170(2)
If you nominate the different *dwellings as your main residences for the period, you split the exemption in accordance with subsections (3) and (4).
118-170(3)
If your interest in the *dwelling you chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your main residence during the period. Otherwise, the dwelling is taken to have been your main residence for half of the period.
118-170(4)
If your *spouse ‘ s interest in the *dwelling your spouse chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your spouse ‘ s main residence during the period. Otherwise, the dwelling is taken to have been your spouse ‘ s main residence for half of the period.
Example:
You and your spouse (who are Australian residents) own a town house as tenants in common in equal shares. You and your spouse also own a beach house as tenants in common, with your interest being 30% and your spouse ‘ s 70%. From 1 July 1999, you live mainly in the town house and your spouse lives mainly in the beach house. On 1 July 2000 you and your spouse dispose of both dwellings.
For the period 1 July 1999-30 June 2000 you nominate the town house as your main residence and your spouse nominates the beach house. The town house is taken to be your main residence during the period. The beach house is taken to be your spouse ‘ s main residence during half the period.
Rollover on divorce https://www.ato.gov.au/law/view/document?LocID=%22PAC%2F19970038%2F118-178%22
This Subdivision applies to the later event in the way that it would if:
(a) your *ownership interest had commenced when your former partner ‘ s ownership interest commenced (the acquisition time ); and
(b) from the acquisition time until the time your former partner ‘ s ownership interest ended:
(i) you had used the *dwelling in the same way that your former partner used it; and
(ii) the dwelling had been your main residence for the same number of days as it was your former partner ‘ s main residence.
EXAMPLES
Example 1:
Peter (the transferor spouse) is the 100% owner of a dwelling that he uses only as a main residence before transferring it to Susan (the transferee spouse). Susan uses the dwelling only as a rental property.
Susan will be eligible for a partial main residence exemption having regard to how both Peter and Susan used the dwelling if, at the time the dwelling is sold, Susan is an Australian resident.
Example 2:
Caroline (the transferor spouse) is the 100% owner of a dwelling that she uses only as a rental property before transferring it to David (the transferee spouse). David uses the dwelling only as a main residence.
David will be eligible for only a partial main residence exemption having regard to how both Caroline and David used the dwelling if, at the time the dwelling is sold, David is an Australian resident.
So what we are trying to say is the spouse previously owned it as a residence for their spouse. Bit of a leap, might be worth a ruling request, if he can say he lived there at sometime after it was transferred to her. But not by virtual that it was his home before the CGT event that transferred it to her.
