Edited version of private ruling

Authorisation Number: 1011511465196

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Ruling

Subject: Capital gains tax

Question

Is the capital gain made on the disposal of your unit disregarded?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased a dwelling and used it to produce assessable income for a number of years prior to you moving into it.

You continued residing in the dwelling for a number of years, and upon moving out, the dwelling was again used to produce income.

You used the dwelling to produce assessable income for a number of years until the dwelling was disposed of.

You have not made the choice to continue treating the dwelling as your main residence from when you moved out of the dwelling until you disposed of it and made a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

You make a capital gain or a capital loss when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity e.g. the disposal of a dwelling.

For most CGT events, your capital gain is calculated by determining the difference between the capital proceeds for the disposal of the CGT asset and the cost base of the asset.

Main residence exemption

A capital gain you make from a CGT event that happens to your main residence is disregarded if you are an individual, the dwelling was your main residence throughout your ownership period and you did not use the dwelling to produce assessable income.

In some cases you can make the absence choice to have a dwelling treated as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence. When this choice is made, you can continue to treat the dwelling as your main residence while it is being used to produce income for up to six years after you cease living in it.

In your case, you did not move into the dwelling when you purchased it, but rented it out for a number of years before you moved into it. You lived in the dwelling for a number of years until it was again used to produce income. You have not made the absence choice to continue to treat the dwelling as your main residence for the period starting from when you moved out of the dwelling until you disposed of the dwelling. Therefore, as the unit was not your main residence for your entire ownership period the capital gain that you have made on the disposal of the unit is not disregarded..

Home first used to produce income

A special rule may apply when a taxpayer loses the entitlement to a full main residence exemption because the dwelling was used for income-producing purposes for the first time. Where the following conditions are satisfied, the taxpayer is taken to have acquired the dwelling or the taxpayer's ownership interest in the dwelling immediately before the first time it was used for income producing purposes for its market value at that time:

- the taxpayer is only eligible for a partial exemption in relation to the dwelling as it was used for the purpose of producing assessable income during the taxpayers ownership period;

- it was first used for income producing purposes after 7.30 pm on 20 August 1996; and

- the taxpayer would have been entitled to a full exemption if the CGT event had happened just before the first time (referred to as the income time) it was used for income producing purposes.

In your case, the unit started being used to produce assessable income prior to 1996, and you would not have been entitled to a full exemption if the CGT event had happened just before you first used the unit to produce income as you had never lived in the until, and it had not been your main residence. As you do not meet the conditions listed above, you will not be eligible for the home first used to produce income special rule. Therefore, you will use the cost base of the unit, and not the market value of the unit when it first started being used to produce assessable income, to calculate any capital gain made on the disposal of the unit.

Partial main residence exemption

As the dwelling was your main residence for only part of your ownership period, you are only entitled to a partial main residence exemption when the CGT event happened to the dwelling.

The capital gain is calculated using the following formula:

Capital gain X Non-main residence days in your ownership period

Total number of days in your ownership period

In your case:

Capital gain will be the difference between the capital proceeds you received from the disposal of the dwelling and the dwelling's cost base.

Non-main residence days will include the following periods:

from the date of settlement when you purchased the dwelling until you began residing in the dwelling, and

from the time you moved out the dwelling until you it was disposed of.

Total number of days in your ownership period will be from the date of settlement until you disposed of the dwelling.

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