Issue
Is each spouse required to have an interest in the dwelling nominated as the main residence of both of them under paragraph 118-170(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Where spouses have different main residences but wish to nominate one of the residences as the main residence of both of them, there is no requirement in paragraph 118-170(1)(a) of the ITAA 1997 that they both have an interest in the nominated residence.
Facts
Two individuals each own a dwelling that they acquired after 19 September 1985 and which was their main residence before their marriage.
After their marriage in the 1999-2000 income year, they both resided in the husband's dwelling and the wife rented out her dwelling.
However, the wife chose to continue to treat her dwelling as her main residence under section 118-145 of the ITAA 1997.
Both dwellings were sold in the 2003-04 income year. The sale of the wife's dwelling yielded a larger capital gain than the sale of the husband's dwelling.
They have therefore nominated the wife's dwelling as the main residence of both of them for the period after their marriage.
Reasons for Decision
If a taxpayer and their spouse each have a dwelling as their main residence during a particular period, they may choose one of the dwellings as the main residence of both of them for the period (paragraph 118-170(1)(a) of the ITAA 1997).
Alternatively, the taxpayer and their spouse may each nominate a different dwelling as their main residence for the period: paragraph 118-170(1)(b) of the ITAA 1997. However, if they make separate nominations, each will only be entitled to a maximum 50% main residence exemption for the period (subsections 118-170(3) and 118-170(4) of the ITAA 1997).
'Spouse' is defined in subsection 995-1(1) of the ITAA 1997 to include a person who, although not legally married to a person, lives with the person on a genuine domestic basis as the person's husband or wife.
There is nothing in paragraph 118-170(1)(a) of the ITAA 1997 to prevent either spouse from nominating the other's dwelling as their main residence even though they do not have an interest in that dwelling.
After their marriage, the husband and wife each have a different dwelling as their main residence for the purpose of the main residence exemption in Subdivision 118-B of the ITAA 1997. The husband's main residence is the dwelling he owns and in which he resides with his wife. The wife's main residence is the dwelling she owns and which she rents out - even though this dwelling has ceased to be her main residence, she can choose under subsection 118-145(1) of the ITAA 1997 to treat it as her main residence.
Nominating the wife's dwelling as the main residence of both the husband and the wife for the period after their marriage will result in a full main residence exemption for the dwelling when it is sold, provided all of the other requirements in Subdivision 118-B of the ITAA 1997 are met. However, no exemption is available for the husband's dwelling for the period after their marriage.
Had the husband and wife instead each nominated a separate dwelling as their main residence under paragraph 118-170(1)(b) of the ITAA 1997 for the period after their marriage, the exemption available for each of them for that period would have been reduced by up to one-half.
The result is the same under the equivalent provisions in sections 160ZZQ(9) and 160ZZQ(10) of the Income Tax Assessment Act 1936 (ITAA 1936). Taxation Determination TD 92/173, in relation to the equivalent provisions in the ITAA 1936, takes the view that a person may nominate, as a main residence, their spouse's dwelling even though that person has no interest in the dwelling.
Note: Section 118-170 of the ITAA 1997 does not apply in respect of the period before the parties in this case were married. As they were not living together on a genuine domestic basis as husband and wife before that time, the requirements of subsection 118-170(1) are not satisfied.