Edited version of private ruling

Authorisation Number: 1011738924052

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Ruling

Subject : Capital gains tax - cost base

Questions and Answers

Are the capital proceeds the market value of the unit on the day it became your main residence?

No.

Are you entitled to the full main residence exemption?

No.

Are you entitled to a partial main residence exemption?

Yes.

Can the ownership costs incurred for the interest you acquired in the property prior to 21 August 1991 form part of your cost base?

No.

Can the ownership costs incurred for the interests in the property you acquired in xx and xx financial years form part of your cost base?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Before 21 August 1991 A gifted a unit to you, B and C (each having a 1/3 share) on the proviso that A would be able to live in the unit rent free.

A transferred the titles of the unit into your name, B and C's names.

After 21 August 1991 you and B bought out C's share in the unit.

In xx A moved into a nursing home.

In xx you purchased the remaining share of the unit from B.

You incurred the following ownership costs between xx and xx;

· Council rates

· Water rates

· ESL

· Interest

· Bank Fees

In xx you moved into the unit electing it to be your principle place of residence and remained there till xx.

In xx you sold the unit.

You did not use the unit to produce income.

The total property on which the unit resides is less than two hectares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Subsection 112-20

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-10

Income Tax Assessment Act 1997 Section 118-185

Reason for Decision

Ownership interest

Under section 118-125, meaning of ownership period, your ownership period of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in:

(a) the dwelling; or

(b) land (acquired on or after 20 September 1985) on which the dwelling is

later built.

Taxation Determination TD 2000/31 states that if a taxpayer owns an interest in a CGT asset and they acquire another interest in the asset, the interests remain separate CGT assets.

Capital Proceeds

Generally, capital proceeds from a CGT event is the total of:

(a)   any money you receive or are entitled to receive in respect of the CGT event happening; and

(b)   the market value of any property which you have received or are entitled to receive in respect of the CGT event happening, worked out at the time of the CGT event. (Section 116-20 of the ITAA 1997).

However, under certain circumstances, there are special rules that may apply when a change of ownership occurs to a CGT asset; these rules modify the capital proceeds.

One of these rules is the market value substitution rule. Under this rule the capital proceeds are taken to be the market value of the CGT asset at the time of the CGT event (Section 116-30 of the ITAA 1997).

Market substitution rule

 Section 112-20 of the ITAA 1997 contains the market value substitution rule. An individual is said to be dealing at arms length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction.  The law looks at not only the relationship between the parties but also the quality of the bargaining between them. 

 The market value substitution rule takes effect if you did not deal at arms length with another entity in connection with the event and they pay more or less than the asset's market value. 

 Overall, the market value substitution rule applies where:

1)      there are no capital proceeds from the event - for example, if you give the CGT asset away as a gift; or

2)      some or all of the capital proceeds from the CGT event cannot be valued; or

3)      the capital proceeds are more or less than the market value of the asset and either:

i)        the taxpayer and the entity that acquired the asset from the taxpayer did not deal with each other at arm's length in connection with the event; or

ii)       the CGT event is the redemption, release, abandonment, surrender, forfeiture or cancellation of the CGT asset.

Main residence

Under section 118-110 of the ITAA 1997, if you are an individual - not a company or trust - you can 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 (also referred to as your home).

To get the full exemption from CGT:

· the dwelling must have been your home for the whole period you owned it (ownership period)

· you must not have used the dwelling to produce assessable income (for example, run a business from it or rent it out), and

· any land on which the dwelling is situated must not be more than two hectares (approximately 4.9 acres).

If you are not fully exempt, you may be partially exempt if:

· the dwelling was your main residence during only part of the period you owned it

· you used the dwelling to product assessable income, or

· the land on which the dwelling is situated is more than 2 hectares.

Partial Main Residence

Where you are not entitled to a full exemption, you may still be able to obtain a partial main residence exemption (section 118-185 ITAA 1997).

You have three separate interests in the property; therefore you will be required to make three separate calculations.

 You calculate your capital gain or loss using the following formula:

 Non-main residence days are the number of days in your ownership period when the dwelling was not your main residence. They are;

Your first interest, the date the title of the unit was put into your name to xx.

Your second interest, xx to xx.

Your third interest, xx to xx.

The ownership period for capital gains tax purposes is from;

Your first interest, the date the title of the unit was put into your name to

xx.

Your second interest, xx to xx.

Your third interest, xx to xx.

In some cases you can choose 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. 

Continuing main residence status after dwelling ceases to be 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.   

 If you make this choice, you cannot treat any other dwelling as your main residence for that period.

Elements of cost base

The cost base of a CGT asset is made up of five elements;

· money or property given for the asset

· incidental costs of acquiring the CGT asset or that relate to the CGT asset

· cost of owning the asset

· capital costs to increase or preserve the value of your asset or to install or move it

· capital costs of preserving or defending your ownership of or rights to your asset.

Before 21 August 1991 A transferred the title to the unit to you, B and C. You each received a 1/3 share in the unit or an interest each in the unit; your first CGT interest.

After 21 August 1991 you and B purchased C's interest in the unit; you both received an equal portion of that interest in the unit; your second CGT interest.

In xx you purchase B's interest in the unit and your third CGT interest.

As previously stated these interests remain a separate CGT interest.

Cost base elements 1 and 3 are relevant to your situation.

Element 1

The money paid for the asset and the market value of property given to acquire the asset are included in the cost base. This is modified if you did not pay the market value for the property and or did not deal at arms length.

Element 3

The costs of owning an asset include rates, land taxes, repairs and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value are also third element costs.

You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you:

· have claimed a tax deduction for them in any income year, or

· omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

You cannot include them at all in the cost base of collectables or personal use assets.

You cannot index these costs or use them to work out a capital loss.

You cannot include any of elements three in the cost base of interest 1 because you acquired the asset before 21 August 1991.

Your cost base for interests 2 and 3 will include any costs you incurred in the third element from the acquisition apportioned to the amount of interest you held at the time.

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