Edited version of your private ruling

Authorisation Number: 1012358248516

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Subject: Capital gains tax - income producing property - spouse separate main residence

Question 1:

Is the first element of the cost base of your property an amount?

Answer:

Yes.

Question 2:

Is the solicitor and stamp duty costs incurred on purchase included in the cost base of the property?

Answer:

Yes.

Question 3:

Are the costs incurred on renovations, carpets and appliances included in the cost base of the property?

Answer:

No.

Question 4:

Are the costs of selling the property included in the cost base?

Answer:

Yes.

Question 5:

Was your calculation of the capital gain on the sale of your property correct?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts:

You purchased a property for an amount with settlement occurring after 20 September 1985.

You moved into the property as soon as practicable.

You were married after 20 September 1985 and resided in the property.

A short time later you moved out of the property and into another property that you purchased with your spouse.

Your spouse owns another property and you resided in this property after moving out of the previous property and continue to do so.

You rented out your property and have made an absence choice in relation to the property.

You ceased renting out the property and undertook some renovations to the property.

You incurred expenses for the renovation, being repairs to the kitchen, walls and new carpets and kitchen appliances.

You sold the property.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 110-25(3)

Income Tax Assessment Act 1997 Subsection 110-25(5)

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-170

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision:

Capital gains

You make a capital gain or capital loss as a result of a capital gains tax (CGT) event. The most common event is CGT event A1. CGT event A1 happens when a person disposes of an asset to someone else. You are deemed to have disposed of an asset if a change in ownership occurs from you to another entity.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. 

The cost base of a CGT asset consists of five elements: 

1. acquisition costs

2. incidental costs relating to the acquisition and subsequent disposal of the asset

3. non-capital costs of ownership which are not deductible

4. capital expenditure to increase the value of the asset, and

5. capital expenditure to establish, preserve or defend title to the asset or a right over the asset.

The first element of the cost base, being the acquisition costs, is the total of the money paid, or required to be paid, and the market value of the property given, in respect of the acquisition. In your circumstance the following would be included in the first element:

· purchase price

Your solicitor fees, stamp duty and selling costs are all incidental costs and are included in the second element of the cost base.

The renovations are considered capital expenditure and are included in the fourth element.

The costs of acquiring the appliances and carpets will not form part of the cost base of your property. These items are considered to be separate assets; the amounts spent on acquiring them would be first element cost base of each individual asset.

On a CGT event happening to your property that CGT event happens to each separate asset comprising the property, separate capital gain or capital loss calculations are necessary for each CGT asset. The capital proceeds are so much of the overall capital proceeds as is reasonably attributable to that asset.

Main Residence Exemption

Generally, you disregard a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence.

To get the full exemption from CGT:

· the dwelling must have been your main residence for the whole period you owned it;

· you must not have used the dwelling to produce assessable income, and

· any land on which the dwelling is situated must be two hectares or less.

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 produce assessable income, or

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

If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or to extend the partial exemption you would otherwise get. For example, these rules can apply to land or a dwelling if:

· you choose to treat the dwelling as your main residence, even though you no longer live in it (continuing main residence exemption)

· you are yet to live in the dwelling but will do so as soon as practicable after it is constructed, repaired or renovated and you will continue to live in it for at least three months;

· you sell vacant land after your main residence is accidentally destroyed.

Continuing the main residence exemption

You can choose to continue to treat a dwelling as your main residence even though you no longer live in it.

If you don't use the property to produce income, you can continue to treat the dwelling as your main residence for an unlimited period after you stop living in it. If you do use it to produce income, you can continue to choose to treat it as your main residence for up to six years.

If you do choose to use the absence rule, you cannot treat any other property as your main residence during this period.

In your case, you purchased the property for an amount with settlement occurring after 20 September 1985. As the property was not your main residence for all of your ownership period any capital gain is not disregarded. You calculate your capital gain using the following formula:

 Taxable net capital gain = gross capital gain X Non main residence days

Days in ownership period

Non-main residence days are the days that the property was not your main residence and half the number of days that your spouse had a separate main residence.

Total ownership period is the number of days between purchase settlement and sale settlement

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