The partial main residence exemption for Capital Gains Tax (CGT) is a valuable provision for Australian property owners who have used their main home for other purposes, such as rental. This exemption helps reduce the CGT payable when selling a property that was not your main residence for the entire ownership period.
Under Subdivision 118-B of the Income Tax Assessment Act 1997, a full CGT exemption is available if the property was your main residence throughout the entire ownership period. However, when a property has been used for both private and income-producing purposes, a partial exemption may apply. This is often misunderstood, with many investors failing to correctly calculate the exempt portion.
To determine the partial exemption, you must calculate the proportion of time the property was used as your main residence versus the time it was rented or otherwise income-producing. This involves considering the total ownership period and the periods of different uses. The most common misconception is that any period of rental disqualifies a property from the main residence exemption entirely, which is not the case.
To see how this plays out, consider a practical example. Imagine you purchased a two-bedroom apartment in Bondi, Sydney, in January 2015 for $800,000. You lived there for three years, then rented it out for two years before selling it in January 2020 for $1,200,000. During your ownership, the property was your main residence for 60% of the time (3 out of 5 years). Therefore, 60% of the capital gain is exempt. The total gain is $400,000. With the partial exemption, $240,000 is exempt, leaving $160,000 subject to CGT. At a 37% tax rate, this results in a CGT liability of $59,200.
In our experience reviewing thousands of properties across Australia, many investors overlook the importance of maintaining accurate records of their property's usage. This is crucial for substantiating claims for partial exemptions. Additionally, some investors mistakenly believe that temporary absences (such as living overseas) automatically disqualify them from the exemption, which is not always the case. Another common oversight is failing to account for the 'six-year rule', which allows you to treat a property as your main residence for up to six years while it is rented out.
The answer can differ depending on your situation. If you purchased a property before 20 September 1985, it is exempt from CGT. For properties acquired after this date, the exemption depends on the property's use. If you use the property for business purposes, different rules may apply. Properties held in a trust or by a company do not qualify for the main residence exemption at all. If you own the property jointly, each owner's usage must be considered separately.
Given the complexity, obtaining professional advice is crucial. A Chartered Quantity Surveyor can provide a detailed assessment of your property's historical usage and potential CGT implications. An accountant can help integrate this information into your overall tax strategy, ensuring you maximise any available exemptions.
Here are some practical steps you can take: