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Edited version of your written advice
Authorisation Number: 1013125881720
Date of advice: 17 November 2016
Ruling
Subject: CGT - main residence
Question
Will a capital gain for tax purposes result from the sale of your main residence?
Answer
No
This ruling applies for the following period
Year ended 30 June 201X
The scheme commences on
1 July 201X
Relevant facts and circumstances
Taxpayer X and Taxpayer Y purchased a property in before 20 September 1995 as joint tenants.
When Taxpayer Y passed away after 19 September 1985, Taxpayer X inherited their share of the property.
Taxpayer X used the property as their main residence from the date of purchase until they moved out. They did not make an election to treat any other property as their main residence.
The property was rented to unrelated tenants for more than X years.
The property was sold in the 201X financial year.
The market value of the property at the time of sale was less than its market value at the time the property was first rented.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 104-10(5)
Income Tax Assessment Act 1997 Section 118-10
Income Tax Assessment Act 1997 Section 118-145
Income Tax Assessment Act 1997 Section 118-145
Reasons for decision
A capital gain or capital loss is made where you dispose of an asset (including a dwelling) you own or have an ownership interest in.
Taxation Determination TD 2000/31 states that if a taxpayer owns an interest in a capital gains tax (CGT) asset and they acquire another interest in the asset, the interests remain separate CGT assets.
Taxpayer X obtained a 50% ownership share of the property at the time of purchase. They obtained the remaining 50% share at the time Taxpayer Y passed away. As the ownership shares were obtained at different times, each ownership share is treated as a separate CGT asset and will be considered individually.
Taxpayer X's original ownership share
Taxpayer X's original ownership share of the property was acquired prior to 20 September 1985 and is considered to be a pre-CGT asset.
Capital gains from the sale of a pre-CGT asset are disregarded under subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997).
Therefore, any gain that is attributable to the sale of Taxpayer X's original ownership share is disregarded and not included in their assessable income for the year ended 30 June 201X.
Taxpayer X's inherited ownership share
Taxpayer X inherited Taxpayer Y's ownership share upon their death after 19 September 1985, thus their inherited ownership share is a post-CGT asset.
Section 118-10 of ITAA 1997 exempts from tax the full amount of a capital gain made from the sale of a dwelling which was your main residence throughout the period you owned the property. This is subject to a number of exceptions.
One exception is where you have been absent from the property and have used it, in your absence, to earn assessable income for more than X years (section 118-145 of ITAA 1997). Generally, in this situation any capital gain from the disposal of the property is only partially exempt.
However, a special rule in section 118-192 of the ITAA 1997 provides that:
● where you would get only a partial exemption upon the sale of the property because it was used to produce assessable income during your ownership period, and
● that use occurred for the first time after 20 August 1996 and
● you would have got a full exemption from paying capital gains tax had the property been sold just before it was first used to produce assessable income
then you are taken to have acquired the property or your ownership interest in the property for its market value at the time just before it was first used to produce assessable income.
Apply this to Taxpayer X's situation:
● Taxpayer X will only receive a partial exemption from any capital gains tax on the disposal of the property as it was rented for more than X years
● the property was first rented in 200X, and
● had the property been sold immediately prior to it being rented, Taxpayer X would have received the full main residence exemption on any resultant capital gain.
As Taxpayer X meets the requirements in section 118-192 of ITAA 1997, they are taken to have acquired their inherited ownership interest in the property at the property's market value immediately before the property was rented. The market value is the property's 'new' cost base.
The property was sold at a price lower than its new cost base. Therefore, there has been a capital loss in relation to Taxpayer X's inherited ownership share of the property. Thus, there is no capital gain to be declared in Taxpayer X's tax return for the year ended 30 June 201X.
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