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Edited version of your written advice
Authorisation Number: 1013099398187
Date of advice: 5 October 2016
Ruling
Subject: Capital gains tax
Question 1
Can you calculate your capital gains tax (CGT) liability using the market value of your property when you commence treating it as your main residence less the cost base?
Answer
No.
Question 2
Can you include the costs of capital improvements, rates, agent commission and marketing while the property is your main residence into the cost base?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 20ZZ
The scheme commences on
1 July 20YY
Relevant facts and circumstances
You purchased the property in 20XX, and have used the property to produce assessable income since this time.
You plan on moving into the property shortly, and treating it as your main residence.
While living in the property, you propose to undertake renovations and sell the property shortly thereafter.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997 section 118-110
Income Tax Assessment Act 1997 section 118-145
Income Tax Assessment Act 1997 section 118-185
Reasons for decision
Question 1
Under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) you are eligible for a full main residence exemption if the dwelling has been the family home for you, your partner and other dependents for the whole period you have owned it (ownership period), has not been used to produce assessable income - that is, you have not run a business from it or rented it out, and is on land that is not more than 2 hectares in area.
Home first used to produce income
In your application for private ruling, you referred to a special rule which allows a market valuation to be used as the cost base when a property is first your main residence and is then used to produce income. This rule, set out in subsection 118-195(1) of the ITAA 1997, can only apply if:
(a) you would get only a partial exemption under this Subdivision for a CGT event happening in relation to a dwelling or your ownership interest in it because the dwelling was used for the purpose of producing assessable income during your ownership period; and
(aa) that use occurred for the first time after 7:30pm, by legal time in the Australian Capital Territory, on 20 August 1996; and
(b) you would have got a full exemption under this Subdivision if the CGT event had happened just before the first time (the income time) it was used for that purpose during your ownership period.
Subsection 118-192(2) of the ITAA 1997 goes on to explain that you are taken to have acquired the dwelling at the income time for its market value at that time.
In your case, the property was used to produce assessable income before it became your main residence. Therefore, you would not have received a full exemption under Subdivision 118 had the CGT event happened just prior to the property becoming your main residence. As you do not satisfy paragraph (b) outlined above, this rule cannot apply to you.
Partial exemption
Under subsection 118-185(1) of the ITAA 1997 you get only a partial exemption for a CGT event that happens in relation to a dwelling if:
a) you are an individual; and
b) the dwelling was your main residence for only part of your ownership period; and
c) the interest did not pass to you as a beneficiary in, and you did not acquire it as trustee of, the estate of a deceased person.
Under subsection 118-185(2) of the ITAA 1997 you calculate your capital gain or capital loss using the formula:
CG or CL amount |
× |
Non-main residence days |
In this case, the property was being used to produce assessable income and you now plan on moving into the property and making it your main residence. When you dispose of the property you will only be entitled to a partial main residence exemption. The formula outlined above can be used to calculate the capital gain or loss.
Question 2
The cost base of a CGT asset is made up of five elements:
• money or property given for the asset
• incidental costs of acquiring the CGT asset or that relate to the CGT event
• costs of owning the asset
• capital costs to increase or preserve the value of your asset or to install or move it
• capital costs of preserving or defending your ownership of or rights to your asset.
You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset. You can include the costs of capital improvements, rates, agent commission and marketing in the cost base.
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