ATO Interpretative Decision
ATO ID 2003/1112 (Withdrawn)
Income TaxCapital gains tax: main residence exemption - dwelling first used to produce income
FOI status: may be released
Guidance relating to the issue addressed in this ATO ID can be found in the Guide to capital gains tax (NAT 4151). Additional guidance can be found in web content Is the dwelling your main residence?(QC 17184), Using your home to produce income(QC 17193) and Selling your home?(QC 22168).This document has changed over time. View its history.
Status of this decision: Decision withdrawn 21 April 2017.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Does section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in working out the capital gain or capital loss on the disposal of a dwelling that was a taxpayer's main residence but ceased to be so when, after 20 August 1996, the taxpayer vacated the dwelling and commenced renting it to tenants?
Yes. Section 118-192 of the ITAA 1997 applies. This means that, for the purpose of calculating their capital gain or loss on the disposal of the dwelling, the taxpayer is taken to have acquired the dwelling for its market value when they commenced renting it.
The taxpayer acquired a dwelling in 1990 which became their main residence.
The taxpayer vacated the dwelling in October 1996 and commenced renting it to tenants.
The dwelling ceased to be the taxpayer's main residence when they vacated it and they did not make a choice under section 118-145 of the ITAA 1997 to continue to treat it as their main residence.
The taxpayer disposed of the dwelling in September 2003.
Reasons for Decision
Section 118-192 of the ITAA 1997 sets out a special rule which is applied in working out a capital gain or loss on a dwelling which has been a main residence and which has also been used for income producing purposes. That rule applies if:
- only a partial main residence exemption would be available under Subdivision 118-B because the dwelling was used for the purpose of producing assessable income during the taxpayer's ownership period: paragraph 118-192(1)(a)
- the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996: paragraph 118-192(1)(aa), and
- the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose: paragraph 118-192(1)(b).
If these conditions are satisfied, the taxpayer is taken to have acquired the dwelling at the time they first started using it for income producing purposes for its market value at that time: subsection 118-192(2) of the ITAA 1997. This has the effect that the first element of the dwelling's cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes (and that expenditure incurred by the taxpayer prior to that day is ignored).
The first condition is that a partial main residence exemption is available because the dwelling was used for income producing purposes. It has been suggested that this condition is only satisfied if there is concurrent use of the dwelling as both a main residence and for the purpose of producing assessable income, such that a partial main residence exemption is available under section 118-190 of the ITAA 1997.
It could be argued that the condition is not satisfied in the present case, where the dwelling is used solely for producing assessable income after it ceases to be a main residence, such that a partial main residence exemption is available under section 118-185 of the ITAA 1997. It might be possible to conclude that the partial main residence exemption in that situation stems from the fact that the dwelling was not a main residence for the whole ownership period, whereas the condition requires the partial exemption to arise 'because' the dwelling was used for income producing purposes.
However, it is considered that the condition in paragraph 118-192(1)(a) can apply in a case such as this, where the income producing use of the property is incompatible with the taxpayer's continued use of the dwelling as their main residence. In that case, the partial exemption can be said to arise 'because' the dwelling was used for income producing purposes. That is, there is a direct nexus between the income producing use and the partial exemption.
For this taxpayer, the other conditions in section 118-192 are also satisfied. Accordingly, the taxpayer is treated as having acquired the dwelling on the day in 1996 that it was first used to produce assessable income. Further, they are taken to have acquired it for its market value on that day: subsection 118-192(2) of the ITAA 1997.
The taxpayer has not made a choice under section 118-145 of the ITAA 1997 to continue to treat the dwelling as their main residence during any of the period it was rented. Therefore, the effect of section 118-192 of the ITAA 1997 applying is that the capital gain or loss made by the taxpayer will broadly equal the difference between the market value on the day in 1996 when the dwelling was first used for income producing purposes and the amount for which the dwelling was sold in September 2003.
Note: ATO ID 2003/1113 explains the effect of section 118-192 of the ITAA 1997 when the taxpayer makes a choice under section 118-145 of the ITAA 1997.Date of decision: 9 October 2003
Year of income: year ended 30 June 2004
Income Tax Assessment Act 1997
ATO ID 2003/1113
Capital gains tax
CGT event A1-disposal of a CGT asset
CGT main residence exemption
Dwelling ceases to be a main residence
Main residence first used to produce income rule
Market value cost base
Date reviewed: 9 December 2014