Edited version of private ruling

Authorisation Number: 1011637002335

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Ruling

Subject: Capital gains tax (CGT) - Disposal of main residence used to income producing purposes

Is the cost base of property A deemed to be the market value on the date it first became income producing?

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You entered into a contract to purchase a dwelling (property A).

You moved in and established property A as your main residence until you moved out approximately 15 months later.

The same month you rented out property A.

Two years later you moved back into the property A and established it as your main residence.

You have elected to continue to treat property A to be your main residence during the period it was rented out.

You and your spouse purchased a property (property B) and established it as your main residence.

You rented out property A.

You had property A valued as you were contemplating disposing of it.

Property A was valued at $X.

Mid last year you entered into a contract to dispose of property A.

You have made a capital loss on the disposal of property A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-185.

Income Tax Assessment Act 1997 Section 118-192.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 102-20.

Reasons for decision

Main residence and absence provisions

Generally, you ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence.

To get the full exemption:

· the dwelling must have been your home for your entire ownership period

· you must not have used the dwelling to produce assessable income, and

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

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

Where a dwelling ceases to be your main residence, you may continue to treat the dwelling as your main residence even though you no longer live in it. This rule applies for up to a maximum period of six years each time the dwelling again becomes and ceases to be your main residence, as long as you do not treat any other dwelling as your main residence during this period.

You can choose when you want to stop the period covered by this choice.

You have chosen to continue to treat property A as your main residence for the period property A was rented out and then you established it again to be your main residence. Property B eventually became your main residence.

Therefore, property A has not been your main residence for all of your ownership period so any capital gain or capital loss made will not be disregarded.

First used to produce income rule

If you start using your main residence to produce income for the first time after 20 August 1985, a special rule affects the way you calculate your capital gain or capital loss.

You are taken to have acquired the dwelling at its market value at the time it is first used to produce income, if all of the following apply:

· you acquired the dwelling on or after 20 September 1985

· when a CGT event happens to the dwelling, you would get only a partial main residence exemption because you have used the dwelling to produce assessable income during your ownership period;

· you first used the dwelling for income producing after 20 August 1996, and

· you would have been entitled to a full main residence exemption if the CGT event happened to the dwelling immediately before you first used it for the income producing purpose.

If all of the above apply, you must calculate your capital gain or capital loss using the market value of the dwelling at the time you first used for it to produce income. You do not have a choice.

Where the market value of an asset needs to be determined, you can either:

· obtain a detailed valuation from a qualified valuer, or

· compute your own valuation based on a reasonably objective and supportable data.

Note: The Australian Taxation Office may challenge valuations where appropriate.

Conclusion

Based on the information you have provided you meet all the conditions for the first used to produce income rule to apply in your circumstances.

Therefore, when you calculate your capital loss on the disposal of property A, the first element of your reduced cost base will be the market value of it on the date you first had it available for rent.

Capital losses

A capital loss must be offset against a capital gain. If you make a capital loss and you have no capital gains in that income year then you can carry the capital loss forward until such time as you have a capital gain. There is no time limit to carrying forward capital losses. You cannot apply a current year capital loss against a prior year capital gain.

For more information on the above please see the enclosed booklets, in relation to the main residence exemption, the cost base and how to calculate your capital gain or capital loss. This information has been taken from the Guide to capital gains tax 2009-10 (NAT 4151-6.2010). Further information is also available on our website.

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