Tax Q&A: Electing not to use the six-year exemption rule

01/11/2018

Question: My brother and I bought a property in November 2010 and lived in it as our main residence until 1 July 2015. At this point I moved out, and my brother stayed in the home a further four months, until 31 October 2015.

My brother then moved out and the property was rented from 1 November 2015 until now.

I moved into another property, for which I want to claim the main residence exemption, so I am not electing to use the six-year exemption rule.

I want to confirm my capital gains tax obligations. Do I need to ascertain the market value of the property as of 1 July 2015, or as of 31 October 2015?

Thanks, Shanti

Answer: At the outset, it should be noted that the main residence exemption provisions in the capital gains tax rules operate on an ‘ownership interest’ basis. Assuming that you and your brother are joint and equal owners of the property, you will be treated as though you each own 50% of the ownership interest in the property on a ‘tenants in common’ basis, even if you legally own the property with your brother as joint tenants.

As a general rule, a dwelling is no longer regarded as your main residence once you move out, although by the laws of the ATO you can elect to still consider the property as a main residence for capital gains tax purposes even if you no longer live there. It can be your main residence for up to six years if it is used to produce income (via rent) and indefinitely if it is not used for profit. However, you cannot treat another property as your main residence in the meantime, except for a short period if you’re moving house. Nonetheless, you cannot make this choice for a period before a property first serves as your main residence.

In respect of the capital gains tax obligations associated with your 50% ownership interest in the property, you would only need to ascertain the market value of the property if you would have been entitled to the main residence exemption in full, had the property been sold immediately before it became available for rent. This is not applicable in your case as your entitlement to the main residence exemption in respect of your ownership interest in the property stopped when you moved out on 1 July 2015 and chose to treat another property as your main residence on that date.

Therefore, if the property is sold in the future, your capital gain or loss will be calculated with reference to the difference between 50% of the capital proceeds on sale and the original cost base of your ownership interest in the property in November 2010. This amount is then apportioned to exclude the period during which the property was your main residence (ie from November 2010 to 1 July 2015). Further, as you have held your ownership interest in the property for more than 12 months since November 2010, you will also be entitled to the 50% capital gains tax discount on any capital gain derived.

Need to know

- Capital gains tax rules operate on an ownership interest basis.

- Joint owners own equal parts on a ‘tenants in common’ basis.

- A 50% CGT discount applies when you own a property for more than a year.

Eddie Chung

is tax and advisory partner at BDO