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Ruling

Subject: CGT - main residence exemption

Questions and answers

Are you entitled to a full main residence exemption on the sale of your two units?

No.

Are you entitled to a partial main residence exemption on the sale of your two units?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You purchased two units a number of years ago.

Both units are on the one title deed.

You are selling both units together in the one transaction.

You lived in unit 1 and rented unit 2 out.

Unit 1 has been your main residence for the whole of your ownership period.

Unit 2 has been rented out the whole of your ownership period.

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 111-190.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-190.

Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision

Generally, capital gains tax does not apply to a taxpayer's main residence. However, you cannot get the full main residence exemption if you:

· acquired your dwelling on or after 20 September 1985 and used it as your main residence, and

· used any part of it to produce income during all or part of the period you owned it, and

· would be allowed a deduction for interest had you incurred it on money borrowed to acquire the dwelling (interest deductibility test).

The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling. If you rent out part of your home, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling.

In your case, you are selling two units that are on the one title deed. You have used one unit as your main residence and one unit as a rental property for the entire ownership period.

As you have used part of the property to produce assessable income, you are not entitled to a full main residence exemption.

You are, however, entitled to a partial main residence exemption. You must apportion any capital gain or loss you make from the sale of the property at the same ratio as the income related deductions were made.

Example

The following example is taken from the Guide to capital gains tax 2012, which is available from our website www.ato.gov.au.

Thomas purchased a home under a contract that was settled on 1 July 1999 and sold it under a contract that was settled on 30 June 2012. The home was his main residence for the entire thirteen years.

Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the home. Only Thomas used the remainder of the home. Therefore, Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home. The home first used to produce income rule does not apply because Thomas used the home to produce income from the date he purchased it.

Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt:

capital gain x percentage of floor area = taxable portion

$120,000 x 35% = $42,000

As Thomas entered into the contract to acquire the home before 11.45am (by legal time in the ACT) on 21 September 1999, and entered into the contract to sell it after he had held it for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.

If you set aside and use part of the dwelling exclusively as a place of business, you cannot get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can you include interest in the cost base if you are entitled to a deduction but do not claim it.

You can still get a full main residence exemption if someone else uses part of your home to produce income and you receive no income from that person.

When a CGT event happens to the home, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable according to the extent to which you would have been able to deduct the interest on money borrowed to acquire the home.

In most cases, this is the proportion of the floor area of the home that is set aside to produce income and the period you use the home to produce income. This includes if the dwelling is available (for example, advertised) for rent.

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