Understanding CGT Main Residence Exemption

With the eligibility age for downsizer dropping from 65 to 60 on 1 July 2022 and that it is not subject to an individual’s total superannuation balance, it provides an opportunity for older Australians to transfer retirement savings into the concessionally taxed superannuation environment.

The premise behind downsizer contributions provided an avenue to contribute those proceeds into superannuation by many older Australians.

Amongst the eligibility criteria for downsizer is the requirement for the proceeds from the sale of the qualifying home to be either fully or partially exempt from income tax under the CGT main residence exemption or would have been entitled to either a full or partial exemption where the qualifying home is a pre-CGT asset. Given only a partial CGT exemption is required, there will be scenarios where an individual will qualify for making a contribution under the downsizer measure even though the property they have sold is not the home that they were actually living in at the time.

Let’s consider the following example which is based on an ATO example of a property, which the individual does not live in at the time of sale, which qualifies for a partial CGT main residence exemption:

Example

James:

• bought a house in Brisbane on 15 September 2011 and moved in immediately.
• moved to Perth on 10 October 2014 and rented out his Brisbane house.
• bought and moved into a new house in Perth on 3 October 2019.
• sold the house in Brisbane on 1 March 2022.

When he completed his 2021–22 tax return, James decided to treat the Brisbane house as his main residence for the period after he moved out in October 2014 until he purchased his new main residence in Perth in October 2019. This is a period of less than 6 years. This means James is entitled to claim a partial main residence exemption under the ‘six-year rule’.

As James decided not to treat the Brisbane house as his main residence after he bought the Perth house, he is subject to CGT for that period. This means James must include a capital gain or loss in the period not covered by the main residence exemption in his 2022 tax return (from October 2019 until March 2022).

The entitlement to a partial CGT main residence exemption is only one of the requirements for eligibility to make a downsizer. Whilst it appears that the property meets the 10 year ownership requirement, other factors would need to be checked, such as his age at the time of making a contribution, to determine James’ entitlement to use the separate downsizer cap for a contribution. However, it is important to be able to correctly apply the CGT main residence exemption rules to ascertain whether this valuable exemption can be claimed. Even where James was not eligible for making a contribution under downsizer, he would still benefit from a partial CGT main residence exemption and a reduced personal tax bill.

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