Edited version of private ruling

Authorisation Number: 1011568508024

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Ruling

Subject: CGT- Main residence in overseas country

Questions and answers

1. Are you entitled to disregard, in full, the capital gain on disposal of your dwelling in country T?

No.

2. Are you entitled to disregard, in part, the capital gain on disposal of your dwelling in country T?

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a country T citizen with a country T passport.

Whilst living in the country T, you purchased a property.

This is the only property you own and you lived in it until around 12 months later.

You came to Australia on a working holiday visa.

You rented your property out when you left country T.

This property has been rented out for about seven years.

You were granted a four year business visa.

You were granted Australian residency and are currently waiting on your Australian citizenship ceremony.

You have not treated any other property as your main residence.

You now intend to sell you country T property.

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 136-10

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 136-25

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

Capital gains tax (CGT) is not a separate tax. Any assessable capital gain is included in your tax return, along with your other income, and taxed at your marginal tax rate. You make a capital gain or capital loss if and only if a CGT event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

CGT event A1 will happen when you sell your country T dwelling (section 104-10 of the ITAA 1997).

A capital gain or capital loss is calculated by reference to your capital proceeds less cost base. In your situation your capital proceeds would be what you receive for the sale of your dwelling.

When you become a resident of Australia for tax purposes you are taken to have acquired those assets that do not have a necessary connection with Australia for their market value at the time you become a resident (section 136-40 of the ITAA 1997). Property located overseas is one type of asset that would not have a necessary connection with Australia (section 136-25 of the ITAA 1997).

Generally, the first element of the cost base for CGT purposes will be the market value of your country T dwelling at the time you become an Australian resident for tax purposes.

Main residence

Factors that may be relevant in working out whether a dwelling is your main residence include:

· the length of time you live there. There is no minimum time a person has to live in a home before it is considered to be their main residence

· whether you have moved your personal belongings into the home

· the address to which your mail is delivered

· your address on the electoral roll

· the connection of services e.g. phone, gas or electricity

· your intention in occupying the dwelling.

You occupied the dwelling from the time you purchased the property until you moved to Australia. You have not treated any other property as your main residence.

Generally, you disregard any capital gain or capital loss you make from the sale of your main residence, if it was your main residence throughout your ownership period (section 118-110 of the ITAA 1997).

Full exemption from CGT is available if you are an individual and the dwelling:

· was your main residence throughout your ownership period

· was not used for income producing purposes at any time, and

· any land on which the dwelling was situated is less than two hectares.

Only a partial exemption from CGT may be available in other circumstances, for example, where the dwelling has been used for income producing purposes during the ownership period.

Six year absence rule

Where a dwelling is used to produce income, you can choose to treat the dwelling as your main residence for up to six years after you cease living in it. If you move back to the dwelling and treat it as your main residence, the six year rule will begin again once you move out.

In your case, you purchased a dwelling. You used the dwelling as your main residence until you moved to Australia around 12 months later. You commenced earning income from the property when you rented it out. You have not treated any other property as your main residence.

As your absence from the property has continued beyond the six year period and you continued to earn income from the property you are not be able to continue to apply the main residence exemption. You will need to calculate a partial capital gain or capital loss on disposal of the dwelling.

Partial main residence exemption

Section 118-185 of the ITAA 1997 states that if a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that occurs in relation to the dwelling.

Section 118-192 of the ITAA 1997 provides a special rule which is applied in working out a capital gain or loss on a dwelling that has been your main residence and which has later been used for income producing purposes. The rule applies if:

· only a partial main residence exemption would be available under Subdivision 118-B of the ITAA 1997 because the dwelling was used for the purpose of producing assessable income during your ownership period

· the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996, and

· you would have been entitled to a full main residence exemption if you had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose.

If the conditions of section 118-192 of the ITAA 1997 are satisfied, the capital gain or loss on disposal of the dwelling is calculated with reference to the market value of the dwelling at the time it was initially used for income-producing purposes. You are taken to have acquired the dwelling at its market value at the time it is first used to produce income. The rule set out in section 118-192 of the ITAA 1997 is described as the 'first used to produce income' rule. 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 you prior to that day is ignored).

The capital gain or loss is calculated using the following formula:

Where:

· non-main residence days is the total days starting from six years after you began renting out the property, and ending on the day you sold it, and

· Days in your ownership period are the total days starting when you are taken to have acquired the property (see first used to produce income rule above) and ending on the day you sold it.

In your case, the conditions for the first used to produce income rule are satisfied. Therefore when you work out your capital gain on disposal of the property, the first element of your cost base will be the market value of the property on the date you first had the property available for rent.

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