Edited version of your written advice

Authorisation Number: 1012787314241

Ruling

Subject: CGT event A1 - disposal of a CGT asset

Question 1

Are you eligible for the full main residence exemption for your property?

Answer 1

No.

Question 2

Are you eligible for a partial main residence exemption for your property?

Answer 2

Yes.

This ruling applies for the following periods:

Year ending 30 June 2015.

Year ending 30 June 2016.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

You purchased your home (the property) in the 200X financial year.

You were the sole occupier and the property is your main residence. Your belongings are held at the property. Water, electricity and other services are connected.

In the 20XX financial year your property commenced producing assessable income when a boarder moved into your home and rented a portion of your dwelling.

Rental income and deductions were included in your income tax returns for the 20XX and 20XX financial years, as confirmed by your tax agent.

The boarder ceased renting a portion of your dwelling half way through the 20XX financial year.

You continue to reside at the property; however you are seriously considering listing your property on the market for sale in the near future.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20.

Income Tax Assessment Act 1997 section 115-10.

Income Tax Assessment Act 1997 section 118-110.

Income Tax Assessment Act 1997 section 118-120.

Income Tax Assessment Act 1997 section 118-185.

Income Tax Assessment Act 1997 section 118-190.

Income Tax Assessment Act 1997 section 118-192.

Reasons for decision

Summary

You are not entitled to a full main residence exemption because your home was used to produce assessable income. You are entitled to a partial main residence exemption for the time your home was not used to produce assessable income, as well as for the portion of your home that was not used to produce assessable income during the time you had a boarder.

Detailed Reasoning

Capital gains

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital loss or gain is made as a result of a capital gains tax (CGT) event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else. CGT assets include real estate acquired on or after 20 September 1985.

Main residence exemption

Generally, a capital gain or loss can be ignored from a CGT event that happens to an ownership interest in a dwelling that is a taxpayer's main residence.

To get the full exemption from CGT:

• The residence must be their home for the whole period that they owned it (subsection 118-110(1)(b) of the ITAA 1997).

• They must not have used the dwelling to produce assessable income (subsection 118-190 of the ITAA 1997).

• Any land on which the dwelling is situated is not more than two hectares (section 118-120 of the ITAA 1997).

In your case, although the property was your home for the whole ownership period and the property was situated on land of less than two hectares, your property was used to produce assessable income for a period of time. Therefore you are not entitled to a full main residence exemption of capital gains tax.

Working out your capital gain

A capital gain is the difference between your capital proceeds (sale price) and the cost base of your CGT asset.

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

The cost base of a CGT asset is made up of five elements:

1. Money or property given for the asset

2. Incidental costs of acquiring the CGT asset or that relate to the CGT event

3. Costs of owning the asset

4. Capital costs to increase or preserve the value of your asset or to install or move it

5. Capital costs of preserving or defending your ownership of or rights to your asset.

In working out a capital gain or loss on a dwelling, the first used to produce income rule in section 118-192 of the ITAA 1997 applies if:

• Only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during your ownership period

• The income producing use started after 7.30pm (by legal time in the ACT) on 20 August 1996, and

• You would have been entitled to a full main residence exemption if you had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose.

As your circumstances satisfy the above requirements, when working out the first element of your cost base, you are taken to have acquired the dwelling for its market value at the time you first started using it for income producing purposes.

In your case you purchased the property in the 200X financial year and lived in the property as your main residence until it became income producing in the 20XX financial year.

The first element of your cost base is the market value of the property on the date which it became income producing in the 20XX financial year, as this is when you are taken to have acquired it under section 118-192 of the ITAA 1997.

For all CGT purposes the acquisition date becomes the date in the 20XX financial year when the property began producing income, and then apportioned for main residence days in the calculation of CGT after the property ceased producing income.

Main Residence and dwelling used to produce income

When a CGT event happens to the property that is a taxpayer's main residence and is also used to produce assessable income, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable according to the extent to which the taxpayer would have been able to deduct the interest on money borrowed to acquire the property (interest deductibility test).

The interest deductibility test applies regardless of whether the taxpayer actually borrowed money to acquire the property and it must be applied on the assumption that money was borrowed.

In most cases, this is the proportion of the floor area of the home that is set aside to produce income during the period you used the home to produce income.

The Tax Office publication Guide to capital gains tax 2014 provides the following example:

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 2013. The home was his main residence for the entire fourteen 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….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

In your case, a portion of the dwelling was used to produce assessable income, for a period of the time whilst you owned the property. Under sections 118-185 and 118-190 of the ITAA 1997, you will use the following calculation to work out your CGT:

Capital gain X       non-main residence days     X percentage of floor area

total days in ownership period

Capital gain is the amount you gained from the CGT event that took place on disposal of your dwelling.

Non-main residence days are the number of days in your ownership period when the dwelling was being used to produce assessable income.

Total days in ownership period are the date of settlement of the contract for purchase until date of settlement of the contract to dispose of the dwelling.

Your total days in ownership period would be from the date you first started using the dwelling for income producing purposes until the date of settlement to dispose of the dwelling.

Percentage of floor area is the percentage of the home that the boarder had access to and use of, and that same percentage for which you would be entitled to deduction for interest if you had incurred it on money borrowed to acquire your home.

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