Spouses with Different Residences
Spend
some time on the weekends on the sidelines of kids' sporting
events. In the course of chatting with middle-aged parents it's
amazing the number of them whose own widowed or divorced parents
have taken up with a new partner. Not, however, in the 'traditional'
sense of getting married and moving into a home but, rather, in
terms of 'getting together' while still maintaining their own 'independence'
- which invariably entails each living in their own home to some
greater or lesser extent. This of course raises some tricky issues
about whether the parties are in fact de facto spouses and, if so,
the extent to which the CGT main residence exemption would be
available in respect of either or both homes (and, equally
importantly, the extent to which the exemption from land tax would
apply).
CGT
rules for spouses with different residences
The CGT
rules for spouses with different main residences apply where a
taxpayer and their spouse have different main residences during a
particular period. Importantly, these rules only apply where, as a
question of fact, each dwelling qualified as the main residences
of the respective spouses over that period. In these
circumstances, section 118-170(1) of the ITAA 1997 provides that
each spouse is required to nominate either:
-
one
of the dwellings as the main residence of both of them, or
-
the
different dwellings as the main residence of each of them.
Where a
nomination is made to treat the different dwellings as the main
residence of each of them, the availability of the main residence
exemption for each dwelling is, in effect, split between the two
dwellings as follows: where a spouse's interest in their nominated
dwelling is 50% or less, the exemption will apply to that interest
for the whole period in question, but where the interest is
greater than 50%, the exemption will apply in respect of that
interest for only half the period.
Note:
there is no requirement that both spouses have an interest in the
nominated dwelling in this case of nomination of different
dwellings: see ATO ID 2003/785.
Example
Nigel
and Katrina jointly own a house in the city that has been their
main residence from 1990 to 1998. In 1998, they buy a hobby farm
in which Nigel has a 75% interest and Katrina a 25% interest. For
a two-year period from 1998 until 2000, Nigel lives mainly at the
farm while Katrina lives mainly in the house in Sydney. In 2005,
they decide to sell both properties.
Nigel nominates his interest in the farm as his main residence
for this two-year period, while Katrina nominates her interest in
the house. Accordingly, Nigel will only be entitled to treat his
75% interest in the farm as his main residence for half the period
(i.e. for one year), while Katrina will be entitled to treat her
50% interest in the house as her main residence for the whole
two-year period.
As a
result, Nigel's 50% interest in the Sydney home will only attract
a partial CGT exemption to reflect the two-year period during
which his interest in it did not qualify as his main residence,
while Katrina will be entitled to a full CGT exemption for her 50%
interest for the whole period of ownership from 1990 to 2005.
Likewise, a partial exemption will apply to Nigel's 75%
interest in the farm to reflect the one year in the seven-year
period of ownership that it was entitled to be treated as his main
residence. On the other hand, Katrina's 25% interest will not be
entitled to any exemption as it did not qualify as her main
residence at any time.
This
is an excerpt from an article by Kirk Wilson (Thomson Senior Tax
Writer) and Anetta Anders (BCom LLB, Senior Associate, Lynch
Meyer), that appeared in Thomson's InTax
magazine (May 2007); Australia's best independent monthly tax
magazine. It provides concise reports of the latest tax news, plus
the practical implications of tax developments in an easy-to-read
magazine format. To find out more, phone Thomson Customer
Service on 1300 304 197 or click
here.
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