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Ruling

Subject: Capital gains tax

Question and answer:

Are you entitled to apply any capital gains tax provisions from the time that you first used the property to earn assessable income?

No.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

Your parents purchased a property pre 20 September 1985.

After a number of years your Parent 1 passed away and ownership of the property fell to your Parent 2 who continued to reside at the property.

Due to debt issues incurred by your sibling, your Parent 2 mortgaged the property to help pay the debts.

After a period your Parent 2 was notified by the bank that the mortgage repayments were falling behind and if the commitments were not met they would have to foreclose on the property.

Fearing that your Parent 2 may loose the house you entered into a family agreement that you would acquire the house from your Parent 2 and take care of any outstanding debts. In exchange your Parent 2 would be allowed to continue to reside in the house rent free.

The property was purchased under your name.

Your Parent 2 passed away a number of years later.

When your Parent 2 passed away you rented the property until it was disposed of.

You did not reside in the property at any stage after you acquired it.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 102-20

Income Tax Assessment Act 1997, Subsection 104-10(5)

Income Tax Assessment Act 1997, Section 110-25

Income Tax Assessment Act 1997, Subsection 110-25(4)

Income Tax Assessment Act 1997, Section 115-5

Income Tax Assessment Act 1997, Subsection 126-5(1)

Income Tax Assessment Act 1997, Subsection 126-6(6)

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. Section 108-5 of the ITAA 1997 lists land and buildings as CGT assets.

Under section 104-10 of the ITAA 1997, a CGT event A1 occurs when you dispose of the CGT asset to someone else. You make a capital gain if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

In your case, you acquired the property from your Parent 2 due to family issues and allowed your Parent 2 to continue to reside in the dwelling rent free. When you Parent 2 passed away you then began to use the property as a rental property until it was sold a number of years later. At no stage during your ownership period did you occupy the property as you main residence.

The disposal of the property triggered a CGT event A1. Any capital gain or loss that results from the disposal of the property will be assessable to you as being sole owner.

We acknowledge the circumstances that lead to you acquiring your Parent 2's residence and the fact that you did not charge your Parent 2 for any rent during her occupation of the property. However, there is no provision within the legislation that gives the Commissioner the discretion to allow you to use the day that the property was first used to earn assessable income as a starting point for the purposes of calculating your capital gain.

Main residence

Generally, you can disregard any capital gain or loss you make when you dispose of your main residence if it was your main residence throughout your ownership period, under section 118-110 of the ITAA 1997. 

In your case at no stage did you occupy the dwelling as your main residence after you acquired the property, therefore you are not entitled to apply the main residence exemption.

Cost base

When working out your capital gain, you are required to calculate the cost base of the CGT asset involved in the CGT event. When working out your capital loss, you determine the reduced cost base of the CGT asset involved with the CGT event.

Section 110-25 of the ITAA 1997 sets out the elements that form the cost base of a CGT asset. The cost base is made up of five elements:

The first element is made up of money paid or required to be paid to acquire the CGT asset.

The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller of buyer, fees paid to an accountant.

The third element consists of non-capital costs incurred in connection with your ownership of a CGT asset.

The fourth element includes capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

This includes capital expenditure you incur to preserve or defend your title or rights to the asset.

With regards to the third element, section 110-25(4) of the ITAA 1997 provides that where you were unable to claim a deduction for the below listed expenses, you are that entitled to include those costs in the third element when calculating your cost base. In your case you were not entitled to claim these expenses because for the period that you Parent 2 occupied the property it was not earning any assessable income.

Third element

Discount capital gain

Generally, the discount method can be used to calculate the capital gain on disposal of a CGT asset if you are an individual, a CGT event happens to a CGT asset that you own after 21 September 1999, and you acquired the asset at least 12 months before the CGT event occurred under section 115-5 of the ITAA 1997.

The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all available capital losses. The discount percentage is 50% for individuals.

In your case, you are an individual, you purchased the property post 21 September 1999 and you had owned the property for a period in excess of 12 months. Therefore you are entitled a 50% discount after you have applied any capital losses.

You apply the 50% discount using the formula below:

(Capital gain - capital losses) x 50% = net capital gain.

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