QUESTION
Since March 2020 and during the COVID-19 pandemic, a client spent 16 months living in a home he owns in rural Victoria in order to attend to business interests he has there. During this time, his wife continued to live in their Melbourne home (where they have lived since their marriage).
In this situation, do they lose their CGT main residence exemption on one or both houses?
Assuming the rural Victorian home is considered to be the husband’s “main residence” during the period he occupied it (see below), then this is correct.
ANSWER
The rule in s 118-170 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents two dwellings from qualifying for the CGT main residence during the same period where one dwelling is the main residence of one spouse in that period and the other dwelling is the main residence of the other spouse in that period.
In this case the client and his wife must either: (a) choose one of the dwellings as the main residence for both of them for the period; or (b) each nominate the different dwellings as their main residences for the period.
If they both choose one of the homes as the main residence for both of them (eg, the Melbourne home) this will mean the rural Victoria home will not be entitled to any CGT main residence exemption for this period. This presumably means that it will continue to be fully subject to CGT, while the Melbourne home will prima-facie remain entitled to the full CGT main residence exemption.
On the other hand, if they each nominate the different homes as their main residences, then they split the CGT main residence exemption between them for the period that they both qualified as main residences of both homes – which, in effect, results in a 50/50 split of the exemption between the two homes.
Specifically, these splitting rules state that if one spouse’s interest in the home that they nominate was a 50% or less interest in the dwelling, then that home is taken to have been that spouse’s main residence during the whole of the overlapping period – but only in respect of that 50% or less interest.
Otherwise, if the interest in the home nominated by the spouse is greater than 50%, then that home is taken to have been that spouse’s main residence for half the overlapping period. (This occurs via the rule in s 118-185 which provides that a partial CGT exemption applies where a dwelling, or interest in it, does not qualify as a taxpayer’s main residence throughout their ownership period.)
And the same rule applies (in a dovetailing fashion) to the client’s wife in respect of the home she nominates.
So, let’s assume the husband owns 100% of the rural Victorian home and he nominates that home, and the wife nominates the Melbourne home, which they jointly own.
In this case, because the husband’s interest in the home he nominates is greater than 50% then it will be taken to have been his main residence or half the period he occupied it as his main residence (ie, for eight months out of 16-month period).
On the other hand, in relation to the Melbourne home that the wife nominates, she gets a full exemption in respect of her 50% interest in the home for the 16-month overlapping period, while the husband gets no exemption in respect of his 50% interest in that period.
See also the example in s 118-170 for further clarification of this rule.
Nomination rule
Other things to note about the nomination rule are as follows:
• a nomination can be made in respect of a dwelling that is deemed to be a main residence under the absence concession (see TD 92/173);
• a spouse need not have an ownership interest in the dwelling in order nominate it as their main residence (see ATO ID 2003/785); and
• where one of the dwellings is pre-CGT and the other post CGT, there is nothing to prevent the spouses nominating the post-CGT dwelling as their main residence to preserve the CGT exemption on both.
When does a dwelling qualify as a main residence?
Importantly, whether a dwelling owned by one spouse qualifies as his or her main residence is a question of fact. It depends upon various matters, such as the length of occupation, intention, postal address etc. (See former TD 51).
Also, perhaps in the COVID-19 period, the ATO may adopt a more lenient view of what is a main residence to mitigate any adverse outcomes from applying this rule.
Meaning of spouse
The rule in s 118-170 only applies to spouses (and specifically excludes spouses living permanently and separately apart). Note, a spouse also includes a spouse under a de facto relationship (s 995-1 definition) and also spouses in a same-sex relationship (as defined in terms of a relationship registered under a relevant State or Territory law or one that arises where the parties live together on a genuine domestic basis: see s 960-252 of the ITAA 1997).
If this article raises questions for you please contact your friendly TSP team for advice on this matter, call on 49 264155 or reach out via email on admin@tspaccountants.com.au.