Disclaimer
This edited version will be removed from the Database after 30 September 2025. If you believe the issues detailed in this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au

This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011564360679

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax - disposal of property

Questions

Will you be liable for capital gains tax on the disposal of property B which was used solely as a rental property?

Yes.

Will you be liable for capital gains tax on the disposal of property Q which you consider to be your main residence?

No.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You and your wife own two properties (Q and B) as joint tenants (50/50 ownership).

You and your wife are the legal owners on the title of the properties.

Property Q was purchased in year P and property B was purchased in year O.

You lived in property Q until late year N and then rented it out.

You consider property Q to be your main residence.

The total land area of property Q is less than 2 hectares.

You moved into property Q immediately after purchase.

During your ownership of property Q, you and your spouse have not had an ownership interest in any other property which you considered to be your main residence.

You purchased property B as an investment property and have rented it out since purchase.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-10.

Income Tax Assessment Act 1997 Section 100-20.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 116-10.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-185.

Reasons for decision

Under subsection 100-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), assessable income includes your net capital gain.  Your net capital gain is the total of your capital gains for the year, less any capital losses you have made.

Subsection 100-20(1) of the ITAA 1997 states that you can only make a capital gain or loss if a CGT event happens.  CGT event A1 occurs when a CGT asset is disposed of as stated in section 104-10 of the ITAA 1997.  The section states that you dispose of a CGT asset if a change of ownership occurs.

A CGT asset includes an interest in a CGT asset under subsection 108-5(2) of the ITAA 1997.

A capital gain occurs when the capital proceeds exceed the cost base of the asset; a capital loss occurs when the reduced cost base exceeds the capital proceeds of the asset.  Capital proceeds are the money or property you have received for the asset.

Under subsection 116-10(2) of the ITAA 1997, if you do not receive any capital proceeds from a CGT event, or you do not deal at arms length in the transaction, you substitute the market value at the time of the disposal for the capital proceeds.

When considering the disposal of your interest in the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property.

In the case of a rental property, you have an ownership interest if you have a legal or equitable interest in the property

The ATO considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title

An individual is considered to have a legal interest in a dwelling if they have a legal or equitable interest in the land on which the dwelling is constructed. Generally, legal ownership of a dwelling is from the date of settlement of the contract to purchase until the date of settlement of the contract for sale.

Taxation Ruling TR 93/32 specifies that a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land and that where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners. Co-owners of a rental property will generally hold the property either as joint tenants or tenants in common.

Regardless of the type of tenancy registered on the legal title to a property, the important feature of both is that they each provide individual co-owners with a legal interest in the property.

In your case, you became the co-owners of the rental property and your main residence when settlement of your contract to purchase took place in year P and year O. In your capacity as joint tenants, you each had a legal interest in the land from the date of settlement of your contract to purchase the rental property until the date of settlement of the contract for the sale of the property.

For taxation purposes, you are therefore considered, to be the legal owners of the rental properties from the contract settlement date of purchase until the date of settlement of the contract for sale of the properties. Therefore you will be liable for any capital gain made in the proportion represented by your registered legal interests.

Disposal of your Rental Property (Property Q)

The disposal of property Q will trigger CGT event A1. As you resided in property Q, you may be entitled to the main residence exemption.

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it (section 118-110 of the ITAA 1997).

However, if the dwelling is not your main residence for your entire ownership period, you will only be entitled to a partial exemption from capital gains tax under section 118-185 of the ITAA 1997.

Main residence 

You can disregard a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence if:

For an established dwelling, there is no restriction on the length of time that you live in the dwelling before it is considered to be your main residence.

To satisfy the conditions for a full main residence exemption the dwelling must be your main residence for your entire ownership period, have not been used to produce assessable income and the size of the land adjacent the dwelling must  be two hectares or less.  

For the purpose of the main residence exemption, you have an ownership interest in a dwelling from the date of settlement of the contract of purchase (or if you have a right to occupy it at an earlier time, that time) until the date of settlement of the contract of sale. This period is called your ownership period. 

In your case, you purchased property Q in year P, moved in as soon as practicable. You moved out in late year N and commenced renting property Q. Therefore, property Q does not meet the above requirements for main residence exemption, however we now need to consider your period of absence from the property.

Continuing main residence status after dwelling ceases to be your main residence 

Subsection 118-145(1) of the ITAA 1997 allows you to choose to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence.

If you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you cease living in it.  

Where you use the dwelling to produce income, you can choose to treat it as your main residence while you use it for that purpose for up to six years after you cease living in it. You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be, your main residence.

In your case you, you started to rent out property Q in late year N and you will sell the property in year M, a period of less than six years. You have not chosen any other property as your main residence during your ownership period of property Q. In your case property Q will be treated as having been your main residence for the whole of your ownership period.

Accordingly, for CGT purposes, you are entitled to treat the dwelling as your main residence from the time you acquired the property in year P until the dwelling is sold under sections 118-150 and 118-145 of the ITAA 1997.

By making this choice, you can therefore disregard the capital gain from the sale of the dwelling under section 118-110 of the ITAA 1997, as the CGT event will happen to a dwelling that was your main residence (for CGT purposes) for the entire period you owned it.

Property B

As property B has always been treated as a rental property and you are the legal owner of the property, you will be liable for any capital gain you make on the sale of the property according to your legal ownership.

Whatever you receive as a result of a CGT event is referred as your capital proceeds. For most CGT events, your capital proceeds are the amount of money or the value of any property you receive (or are entitled to receive).

The cost base of a CGT asset is generally the cost of the asset when you bought it however, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

You work out whether you make a capital gain or a capital loss by comparing your capital proceeds to the cost base and of your interest in the property.

Both the cost base and the reduced cost base of your interest in the property will be worked out from its market value when or if you sell your dwellings.

The cost base consists of five elements. These elements are added together to calculate the cost base. Briefly these are:

Money paid or required to be paid to purchase the asset.

Incidental costs of acquiring your interest in the asset, or costs in relation to the CGT event, for example stamp duty, legal fees, agents commission etc.

You can include non capital costs of ownership in the cost base of assets acquired after 20 August 1991 to the extent they are not deductible against other income (for example rental income). These costs cannot be included when calculating a capital loss.

Note: the reduced cost base consists of the all of the above elements except the 3rd.

If you make a capital gain you can use the 50% discount method to work out how much of the capital gain is assessable.


Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).