Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

1   Part 3-1 Division 118

Division 118 - Exemptions

Table of Subdivisions

Guide to Division 118

118-A General exemptions

118-B Main residence

118-C Goodwill

118-D Insurance and superannuation

118-E Units in pooled superannuation trusts

Guide to Division 118

118-1 What this Division is about

This Division sets out various exemptions for many capital gains and losses.

There are other provisions that provide exemptions from CGT liability, for example, Division 104 (exceptions from CGT events) and Division 50 (exempt entities).

Note: There are also these exemptions in the Income Tax Assessment Act 1936:

· section 23AH (about foreign branch gains and losses of companies);

· section 24B (about External Territories);

· section 26BC (about securities lending arrangements);

· section 27CB (about eligible termination payments);

· section 116DK (about life insurance companies);

· section 121AS (about demutualisation of insurance companies);

· section 121EL (about offshore banking units);

· section 159GZZZN (about buy-back and cancellation of shares);

· section 315 (about superannuation and related businesses);

· section 408 (about calculating the attributable income of a CFC).

Subdivision 118-A - General exemptions

Table of sections

Exempt assets

118-5 Cars, motor cycles and valour decorations

118-10 Collectables and personal use assets

118-12 Assets used to produce exempt income

118-13 Shares in a PDF

Exempt receipts

118-15 Exempt capital receipts

Anti-overlap provisions

118-20 Reducing capital gains if amount otherwise assessable

118-22 Eligible termination payments

118-25 Trading stock

118-30 Film copyright

118-35 Research and development

Exempt or loss-denying transactions

118-40 Expiry of a lease

118-42 Transfer of stratum units

118-45 Sale of rights to mine

118-55 Foreign currency hedging gains and losses

118-60 Gifts under Cultural Bequests Program

[This is the end of the Guide.]

Exempt assets

118-5 Cars, motor cycles and valour decorations

A *capital gain or *capital loss you make from any of these *CGT assets is disregarded:

(a) a *car, motor cycle or similar vehicle;

(b) a decoration awarded for valour or brave conduct (unless you paid money or gave any other property for it).

118-10 Collectables and personal use assets

(1) A *capital gain or *capital loss you make from a *collectable is disregarded if you *acquired it for $500 or less.

(2) However, there is a special rule if the *collectable is an interest in one of these *CGT assets:

(a) *artwork, jewellery, an antique, or a coin or medallion;

(b) a rare folio, manuscript or book;

(c) a postage stamp or first day cover.

A *capital gain or *capital loss you make from the interest is disregarded only if the market value of the asset (when you *acquired the interest) is $500 or less.

Note: If you last acquired the interest before 16 December 1995, a capital gain or loss is disregarded if you acquired the interest for $500 or less: see section 118-10 of the Income Tax (Transitional Provisions) Act 1997.

(3) A *capital gain you make from a *personal use asset, or part of the asset, is disregarded if you *acquired the asset for $10,000 or less.

Note: A capital loss you make from a personal use asset is disregarded: see subsection 108-20(1).

118-12 Assets used to produce exempt income

(1) A *capital gain or *capital loss you make from a *CGT asset that you used solely to produce your *exempt income is disregarded.

(2) However, the exemption does not apply if the asset was used to gain or produce *excluded exempt income or *exempt income subject to withholding tax.

Note: This section is disregarded:

· in calculating the attributable income of a trust: see section 102AAZB of the Income Tax Assessment Act 1936; and

· in calculating the attributable income of a CFC: see section 410 of that Act.

118-13 Shares in a PDF

A *capital gain or *capital loss you make from a *CGT event happening in relation to *shares in a *PDF is disregarded.

Exempt receipts

118-15 Exempt capital receipts

In working out your *net capital gain or *net capital loss for the income year, disregard:

(a) compensation or damages you receive for any wrong or injury you suffer in your occupation; and

(b) compensation or damages you receive for any wrong, injury or illness you or your *relative suffers personally; and

(c) compensation you receive under the *firearms surrender arrangements; and

(d) winnings or losses from gambling, a game or a competition with prizes; and

(e) an amount you receive as reimbursement or payment of your expenses under one of these schemes established by an *Australian government agency:

(i) the General Practice Rural Incentives Program;

(ii) the Sydney Aircraft Noise Insulation Project.

Anti-overlap provisions

118-20 Reducing capital gains if amount otherwise assessable

(1) A *capital gain you make from a *CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in:

(a) your assessable income or *exempt income; or

(b) if you are a partner in a partnership, the assessable income or exempt income of the partnership.

(1A) Subsection (1) applies to an amount that, under a provision of this Act (outside of this Part), is included in:

(a) your assessable income or *exempt income; or

(b) if you are a partner in a partnership, the assessable income or exempt income of the partnership;

in relation to a *CGT asset as if it were so included because of the *CGT event referred to in that subsection if the amount would also be taken into account in working out the amount of a *capital gain you make.

Note: An example is an amount assessable under Division 16E of Part III of the Income Tax Assessment Act 1936, which deals with accruals taxation of certain securities.

(1B) The rule in subsection (1) does not apply to:

(a) an amount that is taken to be a dividend under section 159GZZZP of the Income Tax Assessment Act 1936 (which relates to buy-backs of *shares); or

(b) an amount included in assessable income under section 160AQT of that Act (which relates to franked dividends).

(2) The gain is reduced to zero if it does not exceed:

(a) the amount included; or

(b) if you are a partner, your share (the partner's share ) of the amount included in the assessable income or *exempt income of the partnership (calculated according to your entitlement to share in the partnership net income or loss).

Example: Liz bought some land in 1990, as part of a profit-making scheme. In December 1998 she sells it.

Her profit from the sale is $40,000 and is included in her assessable income under section 6-5 (about ordinary income).

Suppose she made a capital gain from the sale of $30,000. It is reduced to zero because it is does not exceed the amount included.

(3) The gain is reduced by the amount included, or the amount of the partner's share, if the gain exceeds that amount.

Note: These rules are modified for complying superannuation funds that become non-complying and for non-resident superannuation funds that become resident: see Part IX of the Income Tax Assessment Act 1936.

(4) A *capital gain you make from a *CGT event is reduced by the extent that a provision of this Act treats:

(a) an amount of your *ordinary income or *statutory income from the event as being neither assessable income nor *exempt income; or

(b) if you are a partner, your share of the ordinary income or *statutory income of the partnership from the event (calculated according to your entitlement to share in the partnership net income or loss) as being neither assessable income nor *exempt income of the partnership.

Note: An example of a provision of this kind is section 121EG (about offshore banking units) of the Income Tax Assessment Act 1936.

(4A) A *capital gain the trustee of a *superannuation fund makes from a *CGT event happening in relation to a *CGT asset in an income year is reduced if the asset's market value was taken into account in working out the fund's net previous income for earlier income years under section 288A or 288B of the Income Tax Assessment Act 1936.

(4B) The gain is reduced to zero if it does not exceed the amount that would have been the *capital gain from the *CGT event if the *capital proceeds from the event were the asset's market value that was taken into account in working out that net previous income.

If the gain exceeds that amount, it is reduced by that amount.

Exceptions

(5) The gain is not reduced if an amount is included in your assessable income, or the assessable income of the partnership, for any income year because of a balancing adjustment.

(6) The gain is not reduced if an amount is included in your *exempt income under section 23AJ (about exempting certain non-portfolio dividends paid by non-resident companies) of the Income Tax Assessment Act 1936 because a company pays a *dividend to you that is:

(a) debited against a share capital account of the company; or

(b) debited against an account to which the company has credited amounts because of share premiums it received on shares issued by it (even if an amount that is not a share premium, or that cannot be identified as one in the company's books, has also been credited to the account); or

(c) debited against an asset revaluation reserve of the company; or

(d) directly or indirectly attributable to amounts transferred from such an account or reserve of the company.

118-22 Eligible termination payments

In applying section 118-20, if any part of an *eligible termination payment is included in your assessable income, the whole of the payment is taken to be included.

118-25 Trading stock

(1) A *capital gain or *capital loss you make from a *CGT asset is disregarded if, at the time of the *CGT event, the asset is:

(a) your *trading stock; or

(b) if you are a partner, trading stock of the partnership; or

(c) if you are absolutely entitled to the asset as against the trustee of a trust (disregarding any legal disability), trading stock of the trustee.

(2) A *capital gain or *capital loss you make in these circumstances is disregarded:

(a) you start holding as *trading stock a *CGT asset you already own but do not hold as trading stock; and

(b) you elect under paragraph 70-30(1)(a) to be treated as having sold the asset for its cost (worked out under that section).

Note 1: Paragraph 70-30(1)(a) allows you to elect the cost of the asset, or its market value, just before it became trading stock.

Note 2: You may make a capital gain or loss if you elect its market value: see CGT event K4.

118-30 Film copyright

(1) A *capital gain or *capital loss you make from a *CGT event relating to your interest in the copyright in a film is disregarded if:

(a) an amount is included in your assessable income under section 26AG (about film proceeds) of the Income Tax Assessment Act 1936 because of the event; or

(b) an amount would have been included apart from section 23H (about exempting film proceeds) of that Act.

(2) If you are a partner in a partnership, a *capital gain or *capital loss you make from a *CGT event relating to the partnership's interest in the copyright in a film is disregarded if:

(a) an amount is included in the assessable income of a partner (including you) under section 26AG of that Act because of the event; or

(b) an amount would have been included apart from section 23H of that Act.

(3) If you are absolutely entitled to an interest in the copyright in a film as against the trustee of a trust (disregarding any legal disability), a *capital gain or *capital loss you make from a *CGT event relating to the interest is disregarded if:

(a) an amount is included in your assessable income or the net income of the trust under section 26AG of that Act because of the event; or

(b) an amount would have been included apart from section 23H of that Act.

118-35 Research and development

(1) Disregard a *capital gain or *capital loss from a *CGT event if an amount is included in your assessable income in any income year under subsection 73B(27A) of the Income Tax Assessment Act 1936 because of that CGT event.

(2) Disregard a *capital gain or *capital loss from a *CGT event if an amount is included in the assessable income of a partner (including you) in any income year under subsection 73B(27A) of that Act because of that CGT event.

(3) If you are absolutely entitled to a *CGT asset as against the trustee of a trust (disregarding any legal disability), disregard a *capital gain or *capital loss the trustee makes from a *CGT event if an amount is included in your assessable income or the net income of the trust under subsection 73B(27A) of that Act because of that CGT event.

Exempt or loss-denying transactions

118-40 Expiry of a lease

A *capital loss a lessee makes from the expiry, surrender, forfeiture or assignment of a lease (except one granted for 99 years or more) is disregarded if the lessee did not use the lease solely or mainly for the *purpose of producing assessable income.

118-42 Transfer of stratum units

If:

(a) you own land on which there is a building; and

(b) you subdivide the building into *stratum units; and

(c) you transfer each unit to the entity who had the right to occupy it just before the subdivision;

a *capital gain or *capital loss you make from transferring the unit is disregarded.

118-45 Sale of rights to mine

A *capital gain or *capital loss you make from the sale, transfer or assignment of your rights to mine in a particular area in Australia is disregarded if you have *exempt income for the income year (because of section 330-60) from the sale, transfer or assignment.

118-55 Foreign currency hedging gains and losses

A *capital gain or *capital loss you make from a contract you entered into solely to reduce the risk of financial loss you may suffer from currency exchange rate fluctuations is disregarded if the contract relates to:

(a) a liability you have to make a payment under another contract; or

(b) a *CGT asset that is a right you *acquired before 20 September 1985 to receive money under another contract.

118-60 Gifts under Cultural Bequests Program

A *capital gain or *capital loss made from a testamentary gift of property under the Cultural Bequests Program is disregarded.

Subdivision 118-B - Main residence

Guide to Subdivision 118-B

118-100 What this Subdivision is about

You can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence.

However, this exemption may not apply in full if:

• it was your main residence during part only of your ownership period; or

• it was used for the purpose of producing assessable income.

There are special rules for dwellings passed from, or owned by a trustee of, a deceased estate.

Table of sections

118-105 Map of this Subdivision

Basic case and concepts

118-110 Basic case

118-115 Meaning of dwelling

118-120 Extension to adjacent land

118-125 Meaning of ownership period

118-130 Meaning of ownership interest in land or a dwelling

Rules that may extend the exemption

118-135 Moving into a dwelling

118-140 Changing main residences

118-145 Absences

118-150 If you build, repair or renovate a dwelling

118-155 Where individual referred to in section 118-150 dies

118-160 Destruction of dwelling and sale of land

Rules that may limit the exemption

118-165 Separate CGT event for adjacent land or other structures

118-170 Spouse having different main residence

118-175 Dependent child having different main residence

118-180 Acquisition of dwelling from company or trust on marriage breakdown - roll-over provision applying

Partial exemption rules

118-185 Partial exemption where dwelling was your main residence during part only of ownership period

118-190 Use of dwelling for producing assessable income

118-192 Special rule for first use to produce income

Dwellings acquired from deceased estates

118-195 Dwelling acquired from a deceased estate

118-200 Partial exemption for deceased estate dwellings

118-205 Adjustment if dwelling inherited from deceased individual

118-210 Trustee acquiring dwelling under will

118-105 Map of this Subdivision

Map of this Subdivision
              

[This is the end of the Guide.]

Basic case and concepts

118-110 Basic case

(1) A *capital gain or *capital loss you make from a *CGT event that happens in relation to a *CGT asset that is a *dwelling or your *ownership interest in it is disregarded if:

(a) you are an individual; and

(b) the dwelling was your main residence throughout your *ownership period; and

(c) the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.

Note 1: You may make a capital gain or capital loss even though you comply with this section if the dwelling was used for the purpose of producing assessable income: see section 118-190.

Note 2: There is a separate rule for beneficiaries and trustees of deceased estates: see section 118-195.

(2) Only these *CGT events are relevant:

(a) CGT events A1, B1, C1, C2, E1, E2, F2, I1, I2, K3, K4 and K6 (except one involving the forfeiting of a deposit); and

(b) a CGT event that involves the forfeiting of a deposit as part of an uninterrupted sequence of transactions ending in one of the events specified in paragraph (a) subsequently happening.

Note: The full list of CGT events is in section 104-5.

118-115 Meaning of dwelling

(1) A dwelling includes:

(a) a unit of accommodation that:

(i) is a building or is contained in a building; and

(ii) consists wholly or mainly of residential accommodation; and

(b) a unit of accommodation that is a caravan, houseboat or other mobile home; and

(c) any land immediately under the unit of accommodation.

(2) However, except as provided in section 118-120, a dwelling does not include any land adjacent to a building.

118-120 Extension to adjacent land

(1) This Subdivision applies to land that is adjacent to a *dwelling (if the same *CGT event happens to the land or your *ownership interest in it) to the extent that you used the land primarily for private or domestic purposes in association with the dwelling as if it were a dwelling.

(2) The maximum area of land covered by the exemption (including the area of the land on which the *dwelling is built) is 2 hectares.

(3) For a flat or home unit, this Subdivision also applies to a garage, storeroom or other structure that is associated with it (if the same *CGT event happens to the structure or your *ownership interest in it) as if it were a dwelling. However, it so applies only to the extent that you used the structure primarily for private or domestic purposes in association with the flat or home unit.

118-125 Meaning of ownership period

Your ownership period of a *dwelling is the period on or after 20 September 1985 when you had an *ownership interest in:

(a) the dwelling; or

(b) land (*acquired on or after 20 September 1985) on which the dwelling is later built.

118-130 Meaning of ownership interest in land or a dwelling

(1) You have an ownership interest in land or a *dwelling if:

(a) for land - you have a legal or equitable interest in it or a right to occupy it; or

(b) for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

(c) for a flat or home unit - you have:

(i) a legal or equitable interest in a *stratum unit in it; or

(ii) a licence or right to occupy it; or

(iii) a *share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

(2) For land or a *dwelling that you *acquire under a contract, you have an ownership interest in it from:

(a) the time when you obtain legal ownership of it; or

(b) if the contract or a related contract gives you a right to occupy it at an earlier time - the earlier time.

(3) For land or a *dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

Rules that may extend the exemption

118-135 Moving into a dwelling

If a *dwelling becomes your main residence by the time it was first practicable for you to move into it after you *acquired your *ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence.

118-140 Changing main residences

(1) If you *acquire an *ownership interest in a *dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

(a) 6 months ending when your ownership interest in your existing main residence ends; or

(b) the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends.

(2) Subsection (1) only applies if:

(a) your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and

(b) your existing main residence was not used for the *purpose of producing assessable income in any part of that 12 month period when it was not your main residence.

118-145 Absences

(1) If a *dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.

(2) If you use the part of the *dwelling that was your main residence for the *purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

(3) If you do not use the *dwelling for that purpose, you can treat it as your main residence under this section indefinitely.

(4) If you make the choice, you cannot treat any other *dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies.

Example: You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out), at the end of which you sell the house.

You have not treated any other dwelling as your main residence during your absences.

You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years.

You can make this choice when preparing your income tax return for the income year in which you sold the house.

118-150 If you build, repair or renovate a dwelling

(1) This section applies to land in which you have an *ownership interest (except a life interest) if you build a *dwelling on the land, or repair, renovate or finish building a dwelling on the land.

(2) You can choose to apply this Subdivision as if the *dwelling that you are building, repairing or renovating on the land were your main residence from the time you *acquired the *ownership interest.

(3) You can make the choice only if:

(a) a *dwelling on the land that you construct, repair or renovate becomes your main residence as soon as practicable after the work is finished; and

(b) it continues to be your main residence for at least 3 months.

(4) There is a time limit during which the choice can operate. This is the shorter of:

(a) 4 years before the *dwelling becomes your main residence; or

(b) the period starting when you *acquired your *ownership interest in the land and ending when the dwelling becomes your main residence.

(5) If there was already a *dwelling on the land when you *acquired your *ownership interest and you or someone else occupied it after that time, the period in subsection (2) and paragraph (4)(b) starts when the dwelling ceased to be occupied so that it could be repaired or renovated.

(6) Once you make the choice, no other *dwelling can be treated as your main residence during the period referred to in subsection (4), except if section 118-140 (about changing main residences) applies.

118-155 Where individual referred to in section 118-150 dies

(1) This section applies if the individual referred to in subsection 118-150(1) dies:

(a) after the work began, or the individual entered into a contract for it to be done, but before it was finished; or

(b) after the work was finished but before it was practicable for the *dwelling to become the individual's main residence; or

(c) during the period of 3 months referred to in paragraph 118-150(3)(b).

(2) If the individual owned the interest in the land as a joint tenant, the surviving joint tenant or, if none, the trustee of the individual's estate, can choose to apply this Subdivision as if the *dwelling were the main residence of the individual:

(a) when the individual died; and

(b) for the shorter of:

(i) 4 years before the individual's death; or

(ii) the period starting when the individual *acquired the interest in the land and ending when the individual died.

(3) If there was already a *dwelling on the land when the individual *acquired the interest in the land and someone occupied it after that time, the period in subparagraph (2)(b)(ii) starts when the dwelling ceased to be occupied so that it could be repaired or renovated.

(4) If the *dwelling is treated as the deceased's main residence under this section, no other dwelling can be treated as the deceased's main residence at the same time.

118-160 Destruction of dwelling and sale of land

(1) This section applies if a *dwelling that is your main residence is accidentally destroyed and a *CGT event happens in relation to the land on which it was built without you erecting another dwelling on the land.

(2) You can choose to apply this Subdivision to the land as if, from the time of the destruction until your *ownership interest in the land ends, the *dwelling had not been destroyed and were your main residence.

(3) If you do so, you cannot treat any other *dwelling as your main residence during that period, except under section 118-140 (about changing main residences).

Rules that may limit the exemption

118-165 Separate CGT event for adjacent land or other structures

The exemption does not apply to a *CGT event that happens in relation to land, or a garage, storeroom or other structure, to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the *dwelling or your *ownership interest in it.

118-170 Spouse having different main residence

(1) If, during a period, a *dwelling is your main residence and another *dwelling is the main residence of your *spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:

(a) choose one of the dwellings as the main residence of both of you for the period; or

(b) nominate the different dwellings as your main residences for the period.

(2) If you nominate the different *dwellings as your main residences for the period, you split the exemption in accordance with subsections (3) and (4).

(3) If your interest in the *dwelling you chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your main residence during the period. Otherwise, the dwelling is taken to have been your main residence for half of the period.

(4) If your *spouse's interest in the *dwelling your spouse chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your spouse's main residence during the period. Otherwise, the dwelling is taken to have been your spouse's main residence for half of the period.

Example: You and your spouse own a town house as tenants in common in equal shares. You and your spouse also own a beach house as tenants in common, with your interest being 30% and your spouse's 70%. From 1 July 1999, you live mainly in the town house and your spouse lives mainly in the beach house. On 1 July 2000 you and your spouse dispose of both dwellings.

For the period 1 July 1999-30 June 2000 you nominate the town house as your main residence and your spouse nominates the beach house. The town house is taken to be your main residence during the period. The beach house is taken to be your spouse's main residence during half the period.

118-175 Dependent child having different main residence

If, at a particular time, a *dwelling is your main residence and another *dwelling is the main residence of a *child of yours who is under 18 and is dependent on you for economic support, you must choose one of them as the main residence of both of you.

118-180 Acquisition of dwelling from company or trust on marriage breakdown - roll-over provision applying

(1) This Subdivision applies to you as if you owned an *ownership interest in land or a dwelling during a period when it was actually owned by a company or trustee if:

(a) you *acquired the interest from the company or trustee; and

(b) it was acquired by the company or trustee on or after 20 September 1985 ; and

(c) a roll-over was available to the company or trustee under Subdivision 126-A.

(2) If subsection (1) applies to a *dwelling, it cannot be treated as your main residence during the period, despite other provisions of this Subdivision that would allow you to treat it as your main residence during the period.

Partial exemption rules

118-185 Partial exemption where dwelling was your main residence during part only of ownership period

(1) You get only a partial exemption for a *CGT event that happens in relation to a *dwelling or your *ownership interest in it if:

(a) you are an individual; and

(b) the dwelling was your main residence for part only of your *ownership period; and

(c) the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.

(2) You calculate your *capital gain or *capital loss using the formula:

CG or CL amount * (Non-main residence days / Days in your ownership period)

where:

CG or CL amount is the *capital gain or *capital loss you would have made from the *CGT event apart from this Subdivision.

non-main residence days is the number of days in your *ownership period when the *dwelling was not your main residence.

Note: The capital gain or loss may be further adjusted if the dwelling was used to produce assessable income: see section 118-190.

Example: You bought a house in July 1990 and moved in immediately. In July 1993, you moved out and began to rent it. You sold it in July 2000, making (apart from this Subdivision) a capital gain of $10,000.

You choose to continue to treat the dwelling as your main residence under section 118-145 (about absences) for the first 6 of the 7 years during which you rented the house out.

Under this section, you will be taken to have made a capital gain of:

$10,000 * (365 / 3,650) = $1,000

118-190 Use of dwelling for producing assessable income

(1) You get only a partial exemption for a *CGT event that happens in relation to a *dwelling or your *ownership interest in it if:

(a) apart from this section, because the dwelling was your main residence or someone else's during a period:

(i) you would not make a *capital gain or *capital loss from the event; or

(ii) you would make a lesser capital gain or loss than if this Subdivision had not applied; and

(b) the dwelling was used for the *purpose of producing assessable income during all or a part of that period; and

(c) if you had incurred interest on money borrowed to *acquire the dwelling, or your ownership interest in it, you could have deducted some or all of that interest.

Example: You acquire a house as a beneficiary in a deceased estate, rent it out for 12 months and sell it within 2 years of the deceased's death. You can ignore the rental because the exemption does not require the house to be your main residence during the 2 years after the death.

(2) The *capital gain or *capital loss that you would have made apart from this section from the *CGT event is increased by an amount that is reasonable having regard to the extent to which you would have been able to deduct that interest.

(3) However, you ignore any use of the *dwelling for the *purpose of producing assessable income during any period that you continue to treat it as your main residence under section 118-145 (about absences) to the extent that any part of it was not used for that purpose just before it last ceased to be your main residence.

Example: To continue the example from section 118-185, assume that, when you moved in, you used 1/4 of the house as a doctor's surgery.

Under section 118-185, your capital gain was $1,000.

Under this section, it would be reasonable to add an amount of:

$10,000 * (9/10) * (1/4) = $2,250

You have a total capital gain of $3,250 on the sale of the house.

(4) If a *dwelling or your *ownership interest in a dwelling *passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate, you ignore any use of the *dwelling for the *purpose of producing assessable income before the deceased's death if:

(a) the dwelling was the deceased's main residence just before the death; and

(b) it was not being used for that purpose just before the death, or any use for that purpose just before the death was ignored because of subsection (3).

118-192 Special rule for first use to produce income

(1) There is a special rule if:

(a) you would get only a partial exemption under this Subdivision for a *CGT event happening in relation to a *dwelling or your *ownership interest in it because the dwelling was used for the *purpose of producing assessable income during your *ownership period; and

(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time ) it was used for that purpose during your ownership period.

(2) You are taken to have *acquired the *dwelling or your *ownership interest at the income time for its market value at that time.

(3) If your *ownership interest in the *dwelling *passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate and the *CGT event did not happen within 2 years of the deceased' death, you apply this Subdivision as if:

(a) you had *acquired the interest as an individual and not as a beneficiary or trustee of a deceased estate; and

(b) for applying the formula in section 118-185, your non-main residence days were the number of days in your *ownership period when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

Dwellings acquired from deceased estates

118-195 Dwelling acquired from a deceased estate

(1) A *capital gain or *capital loss you make from a *CGT event that happens in relation to a *dwelling or your *ownership interest in it is disregarded if:

(a) you are an individual and the interest *passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.

Note 1: You may make a capital gain or capital loss if the dwelling was used for the purpose of producing assessable income: see section 118-190.

Note 2: In some cases the use of a dwelling to produce assessable income can be disregarded: see sections 118-45 and 118-190.

Note 3: There are special rules for dwellings acquired before 7.30 pm on 20 August 1996. These rules also affect the operation of section 118-192 and subsections 118-190(4) and 118-200(4): see section 118-195 of the Income Tax (Transitional Provisions) Act 1997.

(2) Only these *CGT events are relevant:

(a) CGT events A1, B1, C1, C2, E1, E2, F2, I1, I2, K3, K4 and K6 (except one involving the forfeiting of a deposit); and

(b) a CGT event that involves the forfeiting of a deposit as part of an uninterrupted sequence of transactions ending in one of the events specified in paragraph (a) subsequently happening.

Note: The full list of CGT events is in section 104-5.

118-200 Partial exemption for deceased estate dwellings

(1) You get only a partial exemption (or no exemption) if:

(a) you are an individual and your *ownership interest in a *dwelling *passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) section 118-195 does not apply.

(2) You calculate your *capital gain or *capital loss using the formula:

CG or CL amount * (Non-main residence days / Total days)

where:

CG or CL amount is the *capital gain or *capital loss you would have made from the *CGT event apart from this Subdivision.

non-main residence days is the sum of:

(a) if the deceased *acquired the *ownership interest on or after 20 September 1985 - the number of days in the deceased's *ownership period when the *dwelling was not the deceased's main residence; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

total days is:

(a) if the deceased *acquired the *ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or

(b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

(3) However, if the deceased *acquired the *ownership interest on or after 20 September 1985 and your ownership interest ends within 2 years of the deceased's death and you get a more favourable result by doing so, you can adjust the formula by ignoring any non-main residence days and total days in the period from the deceased's death until your ownership interest ended.

Note 1: The formula in this section will be adjusted (or further adjusted) under section 118-205 if the deceased acquired the dwelling through a deceased estate.

Note 2: There may be a further adjustment if the dwelling was used for the purpose of producing assessable income: see section 118-190.

(4) You ignore any non-main residence days before the deceased's death if:

(a) the *dwelling was the deceased's main residence just before the death; and

(b) the dwelling was not being used for the *purpose of producing assessable income just before the death, or any use for that purpose just before the death was ignored because of subsection 118-190(3).

118-205 Adjustment if dwelling inherited from deceased individual

(1) You must adjust the formula in subsection 118-200(2) if the *ownership interest of the deceased individual referred to in section 118-200 (the most recently deceased ) *passed to the individual on or after 20 September 1985 as a beneficiary in, or the individual owned it as trustee of, a deceased estate.

Note: Any gains or losses of individuals earlier in the inheritance chain are included in the gain or loss you would have made apart from this Subdivision. This section adjusts the formula to take account of times when the dwelling was the main residence of the individuals.

(2) Add to the component total days in the formula the fewer of:

(a) the number of days between 20 September 1985 and the day when the interest *passed to or was *acquired as trustee by the most recently deceased; and

(b) the number of days between the time when an *ownership interest in the *dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

(3) Add to the component non-main residence days in the formula the number of days in the period applicable under subsection (2) that the *dwelling was not the main residence of one or more of:

(a) an individual who owned the dwelling at the time of the individual's death; or

(b) an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c) an individual who had a right to occupy the dwelling under a will; or

(d) an individual to whom an *ownership interest in the dwelling *passed as a beneficiary in, or who *acquired an ownership interest in the dwelling as trustee of, a deceased estate.

118-210 Trustee acquiring dwelling under will

(1) This section applies if you are the trustee of a deceased estate and, under the deceased's will, you *acquire an *ownership interest in a *dwelling for occupation by an individual.

(2) If a *CGT event happens to the interest in relation to the individual and you receive no money or property for it:

(a) a *capital gain or *capital loss you make from the event is disregarded; and

(b) the first element of the *dwelling's *cost base and *reduced cost base in the hands of the individual is its cost base and reduced cost base in your hands at the time of the event; and

(c) the individual is taken to have *acquired it when you did.

(3) If:

(a) you receive money or property for the *CGT event happening or the event happens in relation to another entity; and

(b) the dwelling was the main residence of the individual from the time you *acquired the interest until the time of the event;

you do not make a *capital gain or *capital loss from the CGT event.

(4) However, if the *dwelling was the main residence of the individual during part only of that period, you make a *capital gain or *capital loss worked out using the formula:

CG or CL amount * (Non-main residence days / Days in that period)

where:

CG or CL amount is the *capital gain or *capital loss you would have made from the *CGT event apart from this Subdivision.

non-main residence days is the number of days in that period when the *dwelling was not the individual's main residence.

(5) Only these *CGT events are relevant:

(a) CGT events A1, B1, C1, C2, E1, E2, F2, I1, I2, K3, K4 and K6 (except one involving the forfeiting of a deposit); and

(b) a CGT event that involves the forfeiting of a deposit as part of an uninterrupted sequence of transactions ending in one of the events specified in paragraph (a) subsequently happening.

Note: The full list of CGT events is in section 104-5.

Subdivision 118-C - Goodwill

Table of sections

118-250 Exempting part of a capital gain attributable to goodwill

118-255 Exception

118-260 Meaning of business exemption threshold and indexation

118-250 Exempting part of a capital gain attributable to goodwill

(1) If there is a change in the ownership of a *business of an entity (the primary business ) or its interest in it or that business or interest ends, and the entity makes a *capital gain attributable to the goodwill of the primary business, half of the capital gain is disregarded.

(2) However, that part of the *capital gain is disregarded only if the sum of:

(a) the *net value of the primary business and the net values of *businesses that are *related businesses at the time the *capital gain is made; or

(b) the values of the entity's interests in the net value of the primary business and the net values of *businesses that are *related businesses at that time;

is less than the *business exemption threshold for the income year in which the *CGT event occurred.

(3) A *business is a related business of the primary business if it is carried on by:

(a) the individual who carries on the primary business; or

(b) the company that carries on the primary business or by a company that is a member of the same *wholly-owned group.

(4) If the primary business is carried on by the trustee of a trust (the first trust ), a *business is a related business of the primary business if it is carried on by:

(a) the first trust; or

(b) another trust having the same trustee where an entity that benefits or is capable of benefiting under the first trust benefits or is capable of benefiting under the other trust; or

(c) any other trust having the same trustee where:

(i) the other trust is one of a series of trusts that includes the first trust; and

(ii) each trust in the series (also the first trust ) is linked to at least one other trust in the series in that an entity that benefits or is capable of benefiting under the first trust benefits or is capable of benefiting under the other trust.

118-255 Exception

Section 118-250 does not apply, and is taken never to have applied, to the goodwill if the entity makes an election for the goodwill under subsection 160ZZPQ(1) of the Income Tax Assessment Act 1936 (about roll-overs for the assets of small *businesses).

118-260 Meaning of business exemption threshold

(1) The business exemption threshold for the 1997-98 income year is $2,248,000.

(2) The *business exemption threshold is indexed annually, but the result of the indexation is rounded upwards to the nearest multiple of 1,000.

Note: Subdivision 960-M shows you how to index amounts.

(3) The Commissioner must publish before the beginning of each *financial year the *business exemption threshold for that year.

Subdivision 118-D - Insurance and superannuation

Table of sections

118-300 Insurance policies

118-305 Superannuation

118-310 RSA's

118-300 Insurance policies

(1) A *capital gain or *capital loss you make from a *CGT event happening in relation to a *CGT asset that is your interest in rights under a *general insurance policy, a *life insurance policy or an *annuity instrument is disregarded in the situations set out in this table.

Example 1: Brian (as the insured) receives an insurance payment from his insurer for the destruction of a building he owned as an investment. The payment constitutes capital proceeds on the destruction (CGT event C1). The discharge of the insurance policy (CGT event C2) has no CGT consequences.

Example 2: Peter is the original beneficial owner of the rights under a life insurance policy. He transfers the rights to his spouse for nothing. There are no CGT consequences for him, and none for his spouse if he dies.

(2) Only these *CGT events are relevant: CGT events A1, B1, C2, E1, E2, E3, E5, E6, E7, E8, I1, I2, K3 and K4.

Note: The full list of CGT events is in section 104-5.

118-305 Superannuation

(1) A *capital gain or *capital loss is disregarded if you make it from a *CGT event happening in relation to any of the following:

(a) a right to an allowance, annuity or capital amount payable out of a *superannuation fund or *approved deposit fund;

(b) a right to an asset of such a fund;

(c) a right to any part of such an allowance, annuity, capital amount or asset.

Example: Angela retires from her employment and receives a lump sum payment from her superannuation fund. This is an example of CGT event C2 (her rights to receive the payment ending). There are no CGT consequences for Angela.

(2) However, this exemption is not available if:

(a) you are the trustee of the fund and a *CGT event happens in relation to a *CGT asset of the fund; or

(b) an entity receives a payment or property where:

(i) the entity was not a member of the fund; and

(ii) the entity *acquired the right to the payment or property for consideration.

118-310 RSA's

A *capital gain or *capital loss you make from a *CGT event happening in relation to a right to, or any part of, an *RSA is disregarded.

Subdivision 118-E - Units in pooled superannuation trusts

118-350 Units in pooled superannuation trusts

(1) A *capital gain or *capital loss an entity makes from a *CGT event happening in relation to a unit in a unit trust is disregarded if:

(a) the trust is a *pooled superannuation trust for the income year in which the event happened; and

(b) one of the conditions in subsection (2) is satisfied.

(2) The entity must be:

(a) the trustee of a *complying superannuation fund, a *complying approved deposit fund or a *pooled superannuation trust for the income year in which the *CGT event happened; or

(b) a *life insurance entity and, just before the event happened, the unit must have been included in a *tax advantaged insurance fund of the entity; or

(c) a *registered organisation and, just before the event happened, the unit must have been owned by the entity solely for *tax-advantaged business of the entity.