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Ruling

Subject: Capital gains tax - main residence exemption

Question and answer:

Are you required to pay capital gains tax for the period the property was not your main residence?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You and your sibling inherited a home unit.

You and your sibling owned the unit 50-50.

You bought your siblings share a number of years ago.

You lived in the property for a number of years as your main residence.

You rented the property out for a couple of years.

During this period you had another main residence because you treated your spouse's house as your main residence after you were married.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Subsection 118-145(1).

Income Tax Assessment Act 1997 Subsection 118-145(2).

Income Tax Assessment Act 1997 Subsection 118-145(3).

Income Tax Assessment Act 1997 Subsection 118-145(4).

Income Tax Assessment Act 1997 Section 118-170.

Income Tax Assessment Act 1997 Subsection 118-170(3).

Income Tax Assessment Act 1997 Subsection 118-170(4).

Income Tax Assessment Act 1997 Subsection 103-25(1).

Income Tax Assessment Act 1997 Section 103-25.

Reasons for decision

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 Income Tax Assessment Act 1997 (ITAA 1997)).

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

In some cases, you can choose to have a dwelling treated as your main residence even though you no longer live in it (subsection 118-145(1) of the ITAA 1997). You can only make this choice for a dwelling that you have first occupied as your main residence.

If you use the property to produce income, the maximum amount of time you can treat it as your main residence is 6 years for each time the dwelling again becomes and ceases to be your main residence (subsection 118-145(2) of the ITAA 1997). 

If you do not rent out the property, you can treat it as your main residence indefinitely (subsection 118-145(3) of ITAA 1997).

If you make this choice, you cannot treat any other property as your main residence for that period (subsection 118-145(4) of the ITAA 1997).

As your pre marital property has not been used to produce assessable income you can choose to treat the property as your main residence indefinitely. During the period you make this choice you cannot treat your marital property as your main residence.

Applying the law to your circumstances

You are choosing to treat your marital property as your main residence from the date you moved out of your pre marital property.

You are entitled to a main residence exemption on your pre marital property up until you moved into your marital property.

CGT will be calculated on your non-main residence days.

The steps to follow in determining whether there is a capital gain or capital loss for most CGT events are:

· determine the capital proceeds from the CGT event;

· determine the cost base for the CGT asset;

· subtract the cost base from the capital proceeds;

· where the proceeds exceed the cost base, the difference is the capital gain;

· if the proceeds do not exceed the cost base then determine whether there is a capital loss by working out the reduced cost base of the asset;

· if the reduced cost base exceeds the capital proceeds, the difference is the capital loss; and

· If the capital proceeds are less than the cost base but more than the reduced cost base then there is neither a capital gain or a capital loss.

You will then have your total capital gain. This is the amount to be used in calculating your main residence exemption using the formula:

Capital gain or capital loss amount

Multiplied by non main residence days

Divided by total days.

Calculating your capital gain

A capital gain (or loss) is the difference between your "capital proceeds" and your "cost base". Capital proceeds are the sum of money that you receive upon the sale of the asset.

To calculate your capital gain, you first need to work out the "cost base" of the asset.

The "cost base" consists of five elements, as set out in section 110-25 (ITAA 1997). Briefly, these are:-

· Money paid or required to be paid for the asset when purchased

· Incidental costs of acquiring the asset, or costs in relation to the CGT event, e.g. stamp duty, legal fees, accountant's advice, etc.

· Non-capital costs you incur in connection with your ownership, e.g. interest, rates, land tax, repairs and insurance premiums (provided that you have not, or could not have claimed these costs as a "deduction"). You can include non-capital costs of ownership only in the cost base of assets acquired after 20 August, 1991.

Capital expenditure you incur to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

Capital expenditure you incur to preserve or defend your title or rights to the asset.

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