Income tax: capital gains: how does subsection 118-170(1) of the Income Tax Assessment Act 1997 interact with section 118-145 of that Act?

A dwelling chosen or nominated under subsection 118-170(1) of the ITAA 1997 [1] may be one which is deemed to be a person's main residence because of section 118-145.

A husband and wife own a pre-CGT house which they both occupy. Due to a change in employment, the husband moves to another town and they acquire another (post-CGT) house on 1 July 2000. The husband occupies this house for 2 years during the course of his employment contract. On 1 July 2002, he returns to the pre-CGT house which he then continues to occupy with his wife. The post-CGT house is sold within six years of the husband ceasing to occupy it.

To obtain a full main residence exemption on disposal of the post-CGT house, the husband must make a choice under section 118-145 to treat that house as his main residence for the period 1 July 2002 until disposal. The husband and wife can then choose to treat the post-CGT house as their main residence under paragraph 118-170(1 )( a) for the entire period that they owned it.

If the husband does not make the choice under section 118-145, neither would be entitled to an exemption for the period after the husband ceased to occupy the post-CGT house.