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Edited version of private ruling
Authorisation Number: 1011501116535
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Ruling
Subject: Capital gains tax (CGT) calculation for a property that has been both a rental property and a main residence
Can you use the internal rate of return method to determine the capital gain made on the disposal of your property?
No.
This ruling applies for the following period:
Year ended 30 June 2009.
The scheme commences on:
1 July 1990.
Relevant facts and circumstances
Relevant facts
You acquired a 2/3rds ownership interest in a residential property sometime in the 1990's. At the same time your sibling acquired the remaining 1/3rd ownership interest. The property was purchased as an investment property.
At the time of purchasing the property you were living and working elsewhere in Australia.
Some years later you decided to dissolve the property investment arrangement with your sibling.
At the time you decided to dissolve the property investment arrangement with your sibling a valuation was carried out to determine the value of the property and also to determine a basis for calculating the acquisition by you of the remaining 1/3rd of the property from your sibling.
You became the sole owner of the property because you acquired the remaining 1/3rd of the property from your sibling. At the time you became the sole owner of the property it also became your main residence.
For several years after the property became your main residence you undertook extensive renovations, additions and improvement works to the property. Contracted works amounted to a certain amount and further works was carried out using your own labour with materials amounting to further certain amount (you have kept no receipts for the work you carried out).
Later you sold the property for a certain amount and have made a capital gain.
The majority of the capital growth occurred whilst the property was your main residence.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 109-5
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 115-5
Income Tax Assessment Act 1997 Section 115-10
Income Tax Assessment Act 1997 Section 115-15
Income Tax Assessment Act 1997 Section 115-20
Income Tax Assessment Act 1997 Section 115-25
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-130
Income Tax Assessment Act 1997 Section 118-185
Income Tax Assessment Act 1997 Section 121-20
Income Tax Assessment Act 1997 Section 121-25.
Reasons for decision
Summary
You cannot use the internal rate of return method to determine the capital gain made on the disposal of your property.
Detailed reasoning
Capital gains tax calculation
Where a dwelling has been used both as a rental property and a main residence you calculate your capital gain or capital loss in accordance with section 118-185 of the Income Tax Assessment Act 1997. The formula used to calculate the capital gain or capital loss takes into account the total number of days in your ownership period and the number of non main residence days.
You calculate your capital gain using the formula:
Capital gain or Capital loss amount X Non - main residence days
Days in your ownership period
The Commissioner has no discretion to allow taxpayers to use their own unique method (such as the internal rate of return method) for calculating their capital gain.
Note: Two separate ownership interests
You acquired 2/3rds of the property sometime in the 1990's. The first element of the cost base for this portion of the property will be 2/3rds of the purchase price.
You acquired the remaining 1/3rd of the property some years later from your sibling.
This means that you will be calculating separately the capital gain or capital loss for the 2/3rd and 1/3rd ownership interest respectively.
The fourth element of the cost base of the property will include capital improvements made to the property. The total cost of the capital improvements will need to be apportioned 2/3rds and 1/3rd respectively. (You will not be able to include the value of any capital improvements where you have not kept receipts to verify the expenditure). Note: Under no circumstances can you include the cost of your own labour as an expense.
1/3rd ownership interest
Summary
The capital gain or loss made in relation to the 1/3rd ownership interest in the property acquired from your sibling is disregarded in full.
Detailed reasoning
You can 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 CGT 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 1/3rd ownership interest in the property purchased from your sibling.
This means you will disregard any capital gain made in relation to the 1/3rd ownership interest on the disposal of the property.
2/3rds ownership interest
Summary
The capital gain or loss made in relation to the 2/3rds ownership interest in the property acquired in sometime in the 1990's is disregarded in part.
Detailed reasoning
The 2/3rd ownership interest portion of the property was your main residence during part only of the ownership period therefore you will only be entitled to disregard in part any capital gain made on the disposal of the property.
You calculate your capital gain using the formula:
Capital gain amount X Non - main residence days
Days in your ownership period
The capital gain amount is the amount you would have made from the CGT event happening to the 2/3rd ownership interest.
The non-main residence days is the number of days in your ownership period when the dwelling was not your main residence. (For you this will be from the time the property was purchased until the date the dwelling became your main residence.)
The days in your ownership period will be from the date the property was acquired until the date of settlement for the disposal of 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.