ATO Interpretative Decision

ATO ID 2003/826 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as a result of changes in the law contained in Tax Laws Amendment (2006 Measures No. 4) Act 2006 which repealed Division 136 of Income Tax Assessment Act 1997 (ITAA 1997) with effect from 12 December 2006, applicable to CGT events that happened on or after 12 December 2006 and re-written under the new provisions. See ATO ID 2010/101.
  Despite its withdrawal from the database, this ATO Interpretive Decision continues to be a precedential view in respect of decisions for income years 2002-2003 to 2005-2006.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

For the purposes of the main residence exemption in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997), does the ownership period of a dwelling in a foreign country, include the period that it was owned by a taxpayer prior to their becoming an Australian resident?

Decision

Yes. For the purposes of the main residence exemption, the ownership period of the dwelling commences at the time prescribed in section 118-130 of the ITAA 1997. This means, in the circumstances of this case, that the taxpayer was entitled to a partial main residence exemption under section 118-185 of the ITAA 1997.

Facts

The taxpayer, an individual, was a resident in a foreign country. They acquired a dwelling in that country in 1995 which they used as their main residence before coming to Australia. The dwelling did not have the necessary connection with Australia during this time for the purposes of section 136-25 of the ITAA 1997.

The taxpayer became a resident of Australia during the 2001-02 income year.

The taxpayer sold the dwelling during the 2002-03 income year.

Reasons for Decision

Broadly, if an individual owns land in a foreign country before they become a resident of Australia, only capital gains or capital losses that accrue in respect of the land after they become a resident are subject to the provisions of Parts 3-1 and 3-3 of the ITAA 1997.

Section 136-40 of the ITAA 1997 provides that if a taxpayer becomes a resident of Australia, assets that they own which do not have the necessary connection with Australia are taken to be acquired by them for market value at the time of becoming a resident.

In this case the taxpayer would make a capital gain if the capital proceeds from the sale of the dwelling exceeded the market value at the time they became a resident (assuming no other amounts had subsequently been included in the dwelling's cost base).

An issue arises as to whether the taxpayer is entitled to any main residence exemption for the capital gain, given that the dwelling was their main residence before they became an Australian resident. This depends on whether the acquisition rule in section 136-40 of the ITAA 1997 affects the calculation of the 'ownership period' referred to in Subdivision 118-B of the ITAA 1997.

In applying the main residence exemption, regard is had to a taxpayer's 'ownership period' of a dwelling and the number of days during that period that the dwelling was the taxpayer's main residence. A taxpayer has an ownership interest in land or a dwelling that they acquire under a contract from the time when they obtain legal ownership of it. Generally this happens when the contract is settled, unless the contract gives the taxpayer a right to occupy the dwelling at an earlier time. (subsection 118-130(2) of the ITAA 1997).

In this case, the taxpayer's ownership interest in the dwelling commenced in 1995. Section 118-130 of the ITAA 1997 is not modified in cases where a dwelling is taken to have been acquired at another time by a provision of the ITAA 1997.

If a dwelling is not a taxpayer's main residence for the entire ownership period, section 118-185 of the ITAA 1997 provides that a partial exemption is available. Provided all of the requirements in subsection 118-185(1) are satisfied, the taxpayer calculates their exemption using the formula in subsection 118-185(2).

Accordingly, the taxpayer, who after becoming a resident disposed of a dwelling that was their main residence before they became a resident, can claim a partial main residence exemption under section 118-185 of the ITAA 1997 as follows:

Capital gain (calculated using MV acquisition cost) * (days in the ownership period that the dwelling was main residence \ total days in ownership period)


This view is consistent with that expressed in Taxation Determination TD 95/7. TD 95/7 provides that a taxpayer can make an election under the absence rule (now in section 118-145 of the ITAA 1997) for a dwelling that they owned before becoming a resident of Australia.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 118-130
   subsection 118-130(2)
   section 118-145
   subsection 118-185(1)
   subsection 118-185(2)
   section 136-25
   section 136-40

Keywords
Capital gains tax
Capital gains
Capital losses
CGT asset with the necessary connection with Australia
CGT main residence exemption
Dwelling ceases to be a main residence
Non-resident individuals
Residence in Australia
Resident/residency

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  12 September 2003

ISSN: 1445-2782