Income tax: Capital gains tax: Main residence exemption: absence choice

Can a taxpayer choose to claim the main residence exemption for a dwelling (the first property) under subsection 118-145(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if they have previously claimed the main residence exemption for another dwelling (the second property) for the same period?

Yes, the taxpayer can choose to treat the first property as their main residence under subsection 118-145(1) of the ITAA 1997 (even though they have ceased to live there). The choice is made when they lodge their tax return for the year in which the CGT event happens to the first property (subsection 103-25(1) of the ITAA 1997).

However, as subsection 118-145(4) of the ITAA 1997 prevents any other dwelling being treated as the taxpayer's main residence for the same period the taxpayer will need to amend their earlier income tax return to include the capital gain on the second property that was previously treated as their main residence.

The taxpayer acquired a dwelling ('the first property') after 19 September 1985.

The taxpayer lived in the first property for two years. They then acquired a second property and lived there for five years. The taxpayer sold the second property and acquired a third property.

The taxpayer claimed the main residence exemption on the second property when it was sold and the capital gain from that property was disregarded.

After the sale of the second property the taxpayer sold the first property.

The taxpayer wishes to exercise the choice available under section 118-145 of the ITAA 1997 to elect to continue to treat the first property as their main residence for the period after it ceased to be their main residence up to the time they ceased to own it.

Subsection 118-145(1) of the ITAA 1997 allows the taxpayer to make a choice that a dwelling continues to be treated as their main residence even though it has ceased to be so. The choice can be made for a total of six years where the dwelling was used for the purpose of gaining or producing assessable income, or indefinitely where it was not used for this purpose.

Subsection 103-25(1) of the ITAA 1997 details how the choice is to be made. The section states that a choice made under Part 3-1 or Part 3-3 of the ITAA 1997 must be made: • by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or • within a further time allowed by the Commissioner.

In this case, the taxpayer wishes to choose to treat their first property as their main residence from the time they stopped living in the dwelling to the time they ceased to own it.

The taxpayer is entitled to make this choice in the income year in which they sold the first property. If the taxpayer does not include the capital gain or capital loss from the sale of the first property in their tax return, this is sufficient evidence of their choice (subsection 103-25(2) of the ITAA 1997).

However subsection 118-145(4) of the ITAA 1997 states that where a taxpayer makes this choice they cannot treat another dwelling as their main residence for the same period. By making the choice under section 118-145 of the ITAA 1997 in respect of the first property the taxpayer is not able to claim a main residence exemption for the second property. The taxpayer must request an amendment to their assessment for the income year in which the second property was sold to include in their income the capital gain from the sale of that property.