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Edited version of your private ruling
Authorisation Number: 1012522935773
Ruling
Subject: Capital gains tax
Question and answer:
Can you make a choice under section 118-145 of the Income Tax Assessment Act 1997 to treat the dwelling as your main residence for capital gains tax (CGT) purposes?
No.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You were raised in country X and are a country X citizen.
You purchased a dwelling in country X after 1985.
You moved into the dwelling immediately.
The dwelling was your main residence for the whole time you lived in country X.
You moved to Australian in 20XX.
Shortly before you moved to Australia you rented out the dwelling.
The dwelling was rented out for X years until it was sold.
The dwelling was the only property you owned during your entire ownership period.
You have lived in rental accommodation since arriving in Australia and own no other properties in Australia or abroad.
You are an Australian resident for taxation purposes.
You have furnished Australian tax returns and declared foreign income in your returns since you arrived in Australia.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-135
Income Tax Assessment Act 1997 Section 118-145
Income Tax Assessment Act 1997 Section 855-45
Reasons for decision
Under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997), you can disregard a capital gain or capital loss you make when you dispose of a dwelling that is your 'main residence', as long as:
· the dwelling was your main residence for the whole period you owned it; and
· your interest in the dwelling did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.
A dwelling becomes your main residence as long as you occupy it at the time it is first practicable to do so after settlement for the purchase occurs (section 118-135 of the ITAA 1997).
Section 118-145 of the ITAA 1997 provides that you may continue to treat the dwelling as your main residence despite an absence from the dwelling. This only applies where no other dwelling is treated as your main residence during the period of absence.
Where the dwelling is used to produce assessable income, the period of time you may treat it as your main residence is limited to a maximum of six years. The six year period commences when the dwelling is first used to produce assessable income and ends when the dwelling ceases to be used to derive income.
Section 855-45 of the ITAA 1997 contains the following rules that apply to CGT assets that are owned by individuals who later become Australian residents:
(1) If you become an Australian resident, there are rules relevant to each CGT asset that you owned just before you became an Australian resident, except an asset:
(a) that is taxable Australian property; or
(b) that you acquired before 20 September 1985.
(2) The first element of the cost base and reduced cost base of the asset (at the time you became an Australian resident) is its market value at that time.
(3) Also, Parts 3-1 and 3-3 apply to the asset as if you had acquired it at the time you became an Australian resident.
Part 3-1 of the ITAA 1997 includes sections 118-105 to 118-210 which contain the main residence exemption rules.
In your situation, you:
· purchased a dwelling in country X after 1985 which was used as your main residence;
· rented out the dwelling just before you moved to Australia in 20XX;
· became an Australian resident for taxation purposes; and
· sold the dwelling within six years of moving out of the dwelling and renting it out.
In your case, subsection 855-45(3) operates to alter the date you acquired your dwelling to the date you became an Australia resident for taxation purposes.
Therefore, as the dwelling was rented out at the time you became an Australian resident, the dwelling was rented out at the time you are deemed to have acquired it for Australian income tax purposes. Consequently, the dwelling cannot be treated as your main residence as at the date you became an Australian resident as you had not occupied the dwelling prior to it being used to produce assessable income.
Therefore, you are unable to make a choice under section 118-145 of the ITAA 1997 to treat the dwelling as your main residence for CGT purposes.
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