Edited version of private ruling

Authorisation Number: 94800

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Ruling

Questions: Are you liable for capital gains tax (CGT) on the disposal of your interest in the dwelling in the country?

Answers: Yes.

This ruling applies for the following period(s):

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

In the 1970's you and your spouse jointly purchased a dwelling in an Australian capital city (city address). This dwelling became you and your spouse's main residence.

After 20 September 1985, you and your spouse jointly purchased a dwelling in the country (the dwelling).

The land attached to the dwelling did not exceed two hectares.

You and your spouse originally purchased the dwelling to use as a weekender.

Your spouse was employed in a country regional area for the period of more than three years.

Your spouse resided in the dwelling for the above period.

Your spouse had their mail relating to their employment, car insurance and local mail from organisations directed to the dwelling. Other mail items were directed to the city address and were actioned when your spouse visited the city residence or when you visited the dwelling.

Your spouse moved their personal affects, such as most of their clothing, personal items and furniture into the dwelling.

Your spouse joined local organisations and undertook most of their shopping in the country regional area.

Your spouse's address on the electoral was the city address.

You continued to reside at the city address.

Several years you ceased employment due to a medical condition and you spent more time at the dwelling.

Late last year your spouse moved back to the city address to take up a new employment position.

From late last year until the dwelling was placed on the property market, you and your spouse spent a considerable amount of time preparing the dwelling for its disposal.

Early this year you and your spouse signed the contract for its disposal.

You and your spouse disposed of the dwelling.

Settlement occurred in mid this year.

The dwelling has never been leased or rented out during you and your spouse's ownership period.

You and your spouse have made improvements to the dwelling during your ownership period.

Your spouse elected to continue to treat the dwelling as their main residence after they vacated it.

You and your spouse have elected the dwelling as your main residence for the period when you and your spouse had separate main residences.

The proceeds from the disposal of the dwelling was shared equally between you and your spouse

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-170.

Income Tax Assessment Act 1997 Section 118-185.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 110-25.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

CGT is the tax you pay on certain capital gains you make. You make a capital gain or capital loss as a result of a CGT event.

The most common CGT event (CGT event A1) occurs when you dispose of CGT asset, the time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

A CGT event A1 occurred when you disposed of the dwelling.

Joint ownership

For CGT purposes, individuals who own an asset as joint tenants are each treated as if they own an equal interest in the asset, 50% each.

Main residence exemption

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence.

To get the full exemption:

§ the dwelling must have been your home for the whole period you owned it,

§ you must not have used the dwelling to produce assessable income, and

§ any land on which the dwelling is situated must be two hectares or less.

If you are not entitled to the full main residence exemption, you may be entitled to a partial main residence exemption.

The determination of when a dwelling is a main residence is a question of fact.

Where an individual has more than one residence, the main residence is not determined simply by reference to time in each place, although this is obviously a factor to be considered. In Taxation Determination TD 51 (enclosed), the Commissioner set out factors to be considered when determining if a dwelling is a person's main residence.

Continuing main residence status after dwelling ceases to be your main residence

In some cases, you can choose to continue to treat a dwelling as your main residence even though you no longer live in it.

If you make this choice, you cannot treat any other dwelling as your main residence while you apply this section.

If the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is six years.

If you do not use the dwelling to produce income, you can treat it as your main residence for an unlimited period.

Nominating a main residence

If an individual and their spouse each have a dwelling as their main residence during a particular period, they may choose one of the dwellings as the main residence of both of them for the period.

Alternatively, the individual and their spouse may each nominate a different dwelling as their main residence for the period. However, if they make separate nominations, each will only be entitled to a maximum 50% main residence exemption for the period.

Partial main residence exemption

Only a partial main residence exemption is available if a dwelling was your main residence for part only of the ownership period. The full exemption is proportionately reduced by reference to the period for which the dwelling was not your main residence.

You calculate the part of the capital gain that is taxable as follows:

total capital number of days in your ownership period

gain made from X when the dwelling was not your main residence

the CGT event total number of days in your ownership period

Cost base

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 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, and

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

How the law applies to your situation

In your case, you have a 50% interest in the dwelling. The dwelling was not your main residence for your entire ownership period. The dwelling was established by your spouse as their main residence on the date they moved into the dwelling and they have elected to continue to treat the dwelling as their main residence after they vacated it until its disposal. As you and your spouse had separate main residences you and your spouse have nominated the dwelling as your main residence for this period.

Therefore, as the dwelling has not been your main residence for your entire ownership period, you are not entitled to the full main residence exemption but you are entitled to a partial main residence exemption. You will need to use the above formula to calculate your capital gain or capital loss.

The number of days in your ownership period when the dwelling was not your main residence will be from the purchase date until the date you nominated the dwelling as your main residence.

The total number of days in your ownership period is from the date you acquired the dwelling until settlement date.

You can use the discount method to calculate your capital gain as the necessary criteria have been met. The discount percentage is 50% for individuals.

Enclosed is information on how to calculate your capital gain or capital loss and the costs that can be included in the cost base. Further information is also available on the Tax Office website.

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