Edited version of private ruling

Authorisation Number: 1011477165275

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Ruling

Subject: Main residence - absence choice - first used to produce income rule - adjacent land greater than two hectares

Question 1

Is the capital gain or capital loss made on the disposal of your dwelling and up to two hectares of adjacent land disregarded?

Answer

Yes.

Question 2

Is the capital gain or capital loss made on the disposal of the adjacent land in excess of two hectares disregarded?

Answer

No.

Question 3

Will the first element of the cost base or reduced cost base of the property be the amount paid to acquire the property?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011.

The scheme commences on:

1 June 2002.

Relevant facts and circumstances

You and your partner bought a property.

The land size of the property is greater than two hectares.

The land has not been used for any income producing activities.

The property was your main residence from the time it was purchased until a later time.

At a later time you moved out of the property and had tenants in the property.

You have chosen to continue to treat the property as your main residence since the time you moved out and it became available for rent (you have made an absence choice).

You have not purchased any other property since moving out of your property. You have lived in rented accommodation since you move out of the property.

The property is your only asset.

For the purposes of this ruling you intend to sell your property, with the settlement date occurring within six years of the time that the property was rented out.

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 115-5,

Income Tax Assessment Act 1997 Section 115-25,

Income Tax Assessment Act 1997 Section 118-120,

Income Tax Assessment Act 1997 Section 118-145,

Income Tax Assessment Act 1997 Subsection 118-190(3) and

Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision

Question 1

Summary

The capital gain or capital loss made on the disposal of the dwelling and up to two hectares of adjacent land will be disregarded.

Detailed reasoning

Main residence exemption

You can only claim the full main residence exemption where all of the following are satisfied:

- there was a dwelling on the property when you sold it;

- the dwelling was your main residence for the whole of your ownership period;

- you did not choose to treat any other dwelling as your main residence under the capital gains tax provisions during your ownership period;

- the property is less than two hectares in size; and

- the property was not used to earn assessable income while you resided there.

In your circumstances you can claim the full main residence exemption in relation to the dwelling and up to two hectares of adjacent land.

You can choose which two hectares of land, (including the land that your main residence dwelling is built) that you apply the main residence exemption to. The remaining area of adjacent land, (the excess) is subject to capital gains.

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

In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence.

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

Where you use the dwelling to produce income, you can choose to treat it as your main residence while you use it for that purpose for up to six years after you cease living in it. You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be, your main residence.

If you make this choice, you cannot treat any other dwelling as your main residence for that period.

In your circumstances, your dwelling has been used to produce income for a period of less than six years and you have made the choice to continue to treat your dwelling as your main residence, therefore a full main residence exemption will apply to the dwelling and two hectares of adjacent land.

Question 2

Summary

The capital gain or capital loss made on the disposal of the adjacent land in excess of two hectares will not be disregarded.

Detailed reasoning

Partial Exemption

Your dwelling is situated on land greater than two hectares. The land area in excess of two hectares is therefore excluded from the main residence exemption.

Calculating your capital gain or capital loss

As your main residence exemption only applies to two hectares of your property you will need to apportion your capital proceeds and cost base between the exempt and non exempt land.

The apportionment can be calculated using an area basis or relative market value (if the land is not of equal value) see the attached Taxation Determination 1999/67 for more information.

Your capital gain or capital loss will be half of the total capital gain or capital loss calculated on the disposal of the property because you are a 50% joint owner of the property.

Question 3

Summary

The first element of the cost base or reduced cost base of the property will be the amount paid to acquire the property.

Detailed Reasoning

Home first used to produce income rule and cost base

In working out a capital gain or capital loss on a dwelling, the 'first used to produce income rule' applies if:

- only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during the taxpayer's ownership period;

- the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996; and

- the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose.

If these conditions are satisfied, the taxpayer is taken to have acquired the dwelling at the time they first started using it for income producing purposes, for its market value at that time. This has the effect that the first element of the dwelling's cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes.

In your case, to establish whether or not the 'first used to produce income rule' applies, the first condition is that a partial main residence exemption is available (in relation to the dwelling and adjacent two hectares of land) because the dwelling was used for income producing purposes. That condition is not satisfied in your case because making a choice to continue to treat a dwelling as your main residence after you no longer live there (absence choice) gives you a full main residence exemption in relation to the dwelling and the adjacent two hectares of land. All of the conditions must be satisfied for the 'first used to produce income rule' to apply.

Therefore, the 'first used to produce income rule' will not apply and the first element of the cost base of the property will be the amount paid to acquire the property.

Note: Discount capital gain

As the property has been owned for more than 12 months you can choose to use the discount method to calculate your net capital gain. The discount percentage of 50% is applied to the taxable portion of capital gain after you have offset any capital losses in the income tax year and any unapplied net capital losses from earlier years. Generally this method enables you to reduce your capital gain by half.