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Ruling

Subject: Capital gains tax - acquisitions/disposals

Question and answer:

Can you disregard any capital gain or loss on disposal of your residence

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You have been a resident of Australia for tax purposes since a previous financial year.

You have been living and working in Australia, though you travelled back to a foreign country at frequent intervals.

You and your spouse contracted to purchase a residence in the foreign country. At that time your spouse was your friend.

You were a resident in Australia and owned an Australian dwelling which was and remains your main residence.

Your friend was a resident of the foreign country.

The residence purchase was registered in joint names with each of you having a percentage ownership interest.

Your friend moved into the residence.

Your friend elected to make the residence in the foreign country their main residence from the day they arrived in Australia to live on a permanent basis. On this day your friend also became an Australian resident for taxation purposes but did not elect to make your Australian dwelling their main residence.

On your trips back to the foreign country from Australia you stayed in your residence, although you did not consider your friend to be your spouse before you were married.

Following applications for Australian residency, your spouse was granted an Australian residency visa.

Your spouse moved out of the residence in the foreign country.

You and your spouse contracted to sell the residence in the foreign country.

Settlement was to take place on a date.

A capital gain will be made over and above the purchase price plus renovations.

The apartment has never been rented out.

Relevant legislation provisions:

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Subdivision 118-120

Income Tax Assessment Act 1997 Subdivision 118-170

Reasons for decision

Capital gains tax - general

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

In your case, as the residence that you owned in the foreign country was purchased after September 1985, it is a CGT asset.

Disposal of CGT assets and CGT event A1

Section 104-10 of the ITAA 1997 is concerned with CGT event A1. CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

In your case, the residence that you owned in the foreign country is a CGT asset and a CGT event A1 occurred when you stopped being its owner, i.e. when it is sold.

Main residence exemption 

There are a number of provisions within the ITAA 1997 that may exempt, in part or in whole, a liability for CGT in certain circumstances. The one which is relevant to your circumstances is the main residence exemption.

The main residence exemption under subdivision 118-B of the ITAA 1997 may allow a taxpayer to disregard all or part of any capital gain or capital loss they made from a CGT event that happens to their ownership interest in a dwelling where the dwelling was their main residence.

The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayer's main residence throughout the ownership period (subject to some conditions). A taxpayer may only elect one residence at a time to be their main residence.

In your case, although you stayed in the residence in the foreign country while you moved between the foreign country and Australia, you never elected to make it your main residence during any part of the ownership period. Further, throughout the same period, you owned a dwelling in Australia which has been your main residence.

Application to your circumstances

The residence that you part owned in the foreign country is a CGT asset and a CGT event occurred when you disposed of it. It has never been your main residence. Further, throughout the ownership period, you have maintained a dwelling in Australia which you have treated as your main residence. Therefore, you will not be entitled to claim the main residence exemption from CGT in relation the residence and you will be assessable on any capital gain made as a result of selling it.

As you owned the residence in equal shares with your spouse, any capital gain or loss resulting from its disposal will be shared equally with your spouse.

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