When home not fully covered by main residence exemption

Question

A client purchased a property in 2000 and immediately rented it out. 18 months later he moved back into the property, and then moved out again after 2 years. He then moved back in for three years. He then moved out and then rented it out again for 7 years, and has now sold it. He has never purchased another property. My colleague and I disagree on how CGT is calculated. He says that after the property became his primary residence he can then utilise the 6 year rule moving forward.

I disagree. I believe that as he did not first live in the property the 6 year rule can not apply, and CGT is reduced by the periods when he was living in it.

Could you please clarify using references to the legislation (and explain how S118-135 and S118-145 interact with each other), as my colleague is a senior accountant.

Answer

I am afraid I agree with your colleague. What can’t happen, because the client didn’t move in straight after settlement, is that section 118-192 cannot reset the cost base. The CGT calculation is always going to be apportioned as per section 118-185 over the whole ownership period https://www.ato.gov.au/law/view/print?DocID=PAC%2F19970038%2F118-185&PiT=99991231235958&Life=10010101000001-99991231235959 and section 118-190 which section 118-185 refers to https://www.ato.gov.au/law/view/document?LocID=%22PAC%2F19970038%2F118-190%22 says that 118-145 can be used to count days not living there as covered by the main residence exemption

118-190(3)

However, you ignore any use of the *dwelling for the *purpose of producing assessable income during any period that you continue to treat it as your main residence under section 118-145 (about absences) to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

But there is no way that the main residence exemption can cover the period from when it was purchased to when it became your client’s home for the first time. And of course there is the last time where the rental period exceeded 6 years. Other than that it appears (I trust you to make sure he really did reset) to have reset the 6 years each time he moved back. So the non main residence days are the 18 months at the start and the year at the end.

The use of the word back in this sentence:

“18 months later he moved back into the property” bothers me I gather that was a mistake and that was the first time he moved into the property.

Further you are not specific about the times he is away other than the first and last time. I am assuming none of the other absences exceed 6 years individually.

118-135 is just about giving you a week or so to move into the property after settlement.

I think you might be concerned about this section in 18-145

118-145(1)

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.

This requires him to move in before any main residence exemption can start because he did not move in as soon as practical after settlement as per section 118-135. You need to compare this with section 118-192 where the legislator does intend for the section to only apply if it has always been the taxpayers main residence.

(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.

There is nothing that restrictive in section 118-145, nothing about a full main residence exemption.

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