Edited version of your written advice

Authorisation Number: 1012929197033

Date of advice: 16 December 2015

Ruling

Subject: Capital Gains Tax

Questions and answers

Can an Australian property be treated as a principle residence even when the owner is no longer an Australian resident?

Yes

Will you be assessable on a partial capital gain on the disposal of your main residence where the property has been used as a rental property for more than six years?

Yes

Are you entitled to principle residence exemption for the period the deceased joint tenant treated their share of the property as their principle residence?

No

Are you entitled to use the discount method?

Yes

Are you entitled to the 50% discount available to a resident of Australia?

No

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased a rental property with your parent as joint tenants some time ago.

Upon settlement of the property you and your parent moved into the property and treated it as your principle residence.

You later moved overseas permanently and married an overseas resident.

Since leaving Australia you have only returned for short periods to visit family.

You are a non-resident for taxation purposes.

Your parent remained in the property until they passed away.

After your parent passed away you inherited their share of the property as the only surviving joint tenant.

You sibling resided in the property rent free until sometime later.

The property commenced earning rental income soon after and has remained rented ever since.

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 115-105

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-145

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

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether inside or outside of Australia (section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

You make a capital gain or capital loss if a Capital Gains Tax (CGT) event happens to a CGT asset that you own. Land and dwellings are CGT assets. A CGT event A1 is the most common CGT event, which occurs when you dispose of a CGT asset to someone else.

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.

If you sign a contract to sell your property this will trigger a CGT event A1 and resultant capital gain or capital loss. When you dispose of a property that you consider to be, your main residence you can disregard any capital gain or capital loss that you make if:

• the dwelling was your main residence for the whole period you owned it;

• the dwelling was not used to produce assessable income; and

• the land on which the dwelling is located is not more than two hectares.

However as per section 118-190 of the ITAA 1997 you may still make a capital gain or capital loss even though you comply with this section, if the dwelling was used for the purpose of producing assessable income.

Main residence

An ownership period is defined in section 118-125 of the ITAA 1997 which provides your ownership period of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in the dwelling; or land on which the dwelling is later built.

As such, this condition for utilisation of the main residence exemption requires:

• you have an ownership interest in a legal, equitable interest in the dwelling; and

• you to determine the period from when you held the ownership interest to the time you no longer held the interest.

Six year absence rule

Once a dwelling has been established as your main residence you may continue to treat that dwelling as your main residence during periods of absence, whether you are a resident or a non-resident of Australia. When the dwelling is left vacant you may continue to treat the dwelling as your main residence for an indefinite period.

Where the dwelling is rented, the maximum period that you may continue to treat the dwelling as your main residence is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence. The commissioner does not have any discretion to extend the six year period.

You can choose to apply section 118-145 of the ITAA 1997 which is the provision for absences to continue to treat the dwelling as your main residence, even though it has ceased to be so, for the total period of six years where the dwelling was used to produce assessable income. However if you make that choice, you cannot treat any other dwelling as your main residence while you apply the absence rule to this main residence.

More than six years absence and the property has been used for producing income

If your absence from the dwelling continues beyond the six year period and you continue to earn income from the property, you are not able to continue the main residence exemption. You will need to calculate a partial capital gain or capital loss on disposal of the property.

If you start using part or all of your main residence to produce income for the first time after 20 August 1996 a special rule affects the way you calculate your capital gain or capital loss.

In this situation you are taken to have acquired the dwelling at its market value at the time you first used it to produce income if all of the following apply:

• you acquired the dwelling on or after 20 September 1985

• you first used the dwelling to produce income after 20 August 1996

• when a CGT event happens to the dwelling, you would get only a partial exemption, because you used the dwelling to produce assessable income during the period you owned it, and

• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

If all of the above apply you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. This has the effect that the first element of the dwellings cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes and that expenditure incurred prior to that day is ignored. Your cost price of the share acquired from the deceased tenant is the cost price of the property on the date the joint tenant became deceased.

Where ownership of a dwelling satisfies the main residence exemption for only part of the ownership period, you will need to apportion your capital gain under subsection 118-185(1) of the ITAA 1997.

The capital gain which is assessable is calculated using the following formula under subsection 118-185(2) of the ITAA 1997:

Capital gain amount X total non-main residence days

total number of days of your ownership period

The non-main residence days are the number of days in your ownership period when the dwelling was not your main residence, that is, the period from the end of the six years allowed under the absence rule until the date the property is sold. You make a capital gain if your capital proceeds exceed your cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

Cost Base

If a dwelling that was your main residence is used to produce income during the ownership period, and that use commenced after 20 August 1996, you would have had a full main residence exemption if you had sold the dwelling just before you began using it as a rental property. You are then taken to have acquired the dwelling for its market value at the time it first became income producing under section 118-192 of the ITAA 1997 and detailed in ATOID 2003/1112.

Where the market value of an asset needs to be determined, our publication 'Market valuation for tax purposes' provides assistance to taxpayers and their advisers on the processes to establish the market value for taxation purposes. The accepted principles of valuations are outlined in this guide.

Discount method

CGT is applicable on taxable Australian property which includes real estate located in Australia, regardless of your residency status. As you were a foreign resident on 8 May 2012 and had no period of residency after this date you are not entitled to a CGT discount using the apportionment method. If the market value of your asset on 8 May 2012 is greater than its cost base on 8 May 2012 you are eligible to use the market value method. If the market value of your asset on 8 May 2012 is less than or equal to its cost base (without indexation) you are not eligible to use the market value method. If the difference between the market value of the asset and the cost base (without indexation) of the asset on 8 May 2012 is equal to or greater than the discount capital gain you are entitled to the full CGT discount percentage of 50% as per section 115-105 ITAA 1997.

Application to your circumstances

You have rented out the property continuously from some time ago, exceeding the six year period that you may continue to treat the property as your main residence for the purposes of obtaining the full main residence exemption under the absence provisions. If you make a capital gain when you sell the property you will have a partial capital gain liability covering the period for which the main residence exemption could not be applied to your property.

Firstly, you would be entitled to a partial main residence exemption under the normal CGT calculations. However if you had of disposed of the property just before it was first rented out you would have had no capital gain. Therefore section 118-192 of the ITAA 1997 will operate to deem your acquisition date to be when the property first commenced earning rental income and the first element of your cost base to be the market value on that date.

Secondly, the discount percentage you will be entitled to will be changed from the normal 50% because you have been a non-resident for the entire period of your deemed ownership of the property and it will be disposed of after 8 May 2012.

As you were not a resident on 8 May 2012 you may elect to use the market value method to calculate the discount percentage.

What this means is that if the cost base of the property on 8 May 2012 is less than the market value on that day the discount percentage will be either:

• 50% if when you dispose of the property the final capital gain is less than the excess on 8 May 2012

• Or the excess on 8 May 2012 divided by double the final capital gain expressed as a percentage. (This is because you have been a non-resident for the whole period after 8 May 2012.)

If you do not choose to apply the market value method or if the cost base on 8 May 2012 is greater than the market value on 8 May 2012 the discount is 0%.

Note: if you were to become a resident of Australia for a period before disposing of the property the calculation above would change.

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