Edited version of private ruling

Authorisation Number: 1011473538729

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Ruling

Subject: Capital gains tax, main residence exemption

Question

Will the capital gain you make on the disposal of your dwelling be disregarded?

Advice/Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your then spouse jointly purchased a dwelling sometime after 20 September 1985.

The dwelling was rented out until you occupied the dwelling as your main residence.

As part of your divorce settlement, your spouse's share of the dwelling was transferred to you.

You rented the dwelling out sometime after it was transferred to you.

You chose to continue to treat the dwelling as your main residence.

You later moved back into the dwelling and occupied it as your main residence.

Sometime after you moved back in, you again rented out the dwelling.

You chose to continue to treat the dwelling as your main residence.

You intend to sell the dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-192

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Issue 1

Question

Detailed reasoning

Change of ownership- joint to sole

Where an individual who owns a property jointly with another individual, acquires the interest of the other owner of the property, they now have two separate interests in the property, their original interest and the interest acquired from the other joint owner.

In your case, you acquired your original interest in the dwelling, for your share of the purchase price. You acquired the remaining interest in the dwelling as part of the divorce settlement from your spouse, for the cost base of their share at the time the transfer occurred. You now hold two separate interests in the dwelling.

Main residence exemption

You make a capital gain or capital loss if a capital gains tax (CGT) event happens. The most common event occurs if you dispose of a CGT asset, such as your home. This is called CGT event A1.

Generally, a capital gain or loss that was made on the disposal of your home can be disregarded if you are an individual, the dwelling was your main residence for the entire time you owned the property and you did not use it to produce assessable income.

In your case, as you purchased your share of the dwelling (your original interest) sometime after  20 September 1985, and did not occupy it as your main residence until you moved in some time later, the dwelling was not your main residence for this period between the settlement for the purchase and when you occupied it as your main residence.

Absence choice

If a dwelling that was your main residence ceases to be your main residence, you can choose to continue to treat it as your main residence. If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period you can continue to treat the dwelling as your main residence is six years.

If you make this choice, you cannot treat any other dwelling as your main residence during this time.

As you did not occupy the dwelling as your main residence prior to renting the dwelling out soon after its acquisition, you cannot make an absence choice for that period.

You occupied the dwelling later as your main residence. As you then rented the dwelling out for a period of less than six years each time the dwelling ceased to be your main residence, and this choice together with the times you lived in the dwelling will cover your ownership period from the purchase settlement, until the dwelling will be sold, your original interest in the dwelling is considered to have been your main residence for this period.

You acquired the remaining interest in the dwelling at a later date, as part of your divorce settlement. At the time you were occupying the dwelling as your main residence. As you then rented the dwelling out for a period of less than six years each time the dwelling ceased to be your main residence, and this choice together with the times you lived in the dwelling will cover your entire ownership period of the remaining interest, until this dwelling will be sold, your remaining interest in the dwelling is considered to have been your main residence for your entire ownership period. Any capital gain or capital loss you make on disposal of this interest is disregarded.

Calculating your capital gain

You calculate your capital gain for a period where your dwelling was your main residence for only part of your ownership period using the following formula;

Capital gain x Non main residence days/ Days in your ownership period.

where:

Capital gain is calculated as the amount of capital proceeds you receive for the sale of your dwelling, minus the cost base of the dwelling. In your case, as the capital gain will be calculated on your original interest in the dwelling, the proceeds you receive for the disposal of the dwelling will need to be apportioned between your original interest and your remaining interest. The cost base will be calculated with reference to the cost of the dwelling at the time you acquired your original interest. For more information about the five elements of the cost base, please refer to the Guide to capital gains tax 2009 located on the Australian Tax Office's website www.ato.gov.au.

Non main residence days is the number of days in your ownership period of the dwelling that it was not your main residence. In your case this will be from the date of settlement for the purchase of the dwelling until you occupied the dwelling as your main residence.

Days in your ownership period will be the total number of days that you owned the dwelling. In your case this is from the date of settlement of the contract for the purchase of the dwelling, in November 1996, until the date of settlement of the contract for the sale of the dwelling.

Note:

As you are an individual, your dwelling will be sold after 21 September 1999, you held the dwelling for at least 12 months, and provided you do not calculate your cost base with reference to indexation, any capital gain make on the disposal of your original interest is a discount capital gain. In your case you are entitled to reduce the capital gain made during the time you are not eligible for the full main residence exemption by 50% when working out your net capital gain.