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Edited version of private ruling

Authorisation Number: 1011610979560

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Ruling

Subject: Capital gains tax (CGT) - Disposal of main residence and attached shop

Is the capital gain or capital loss made on the disposal of your main residence and attached shop disregarded?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

After 20 September 1985, you and your partner purchased a property (property A) which consists of a shop and residence.

The area of the shop consists of a small portion of property A.

You and your partner have rented out the shop for most of you and your partner's ownership period.

Two years later you and your partner purchased another property (property B) which you and your partner renovated.

Later in the year you and your partner moved into property B.

More than six year later you and your partner moved back into property A.

During the period above period you and your partner rented out property A.

You have made the choice to continue to treat property A as your main residence.

You and your spouse intend putting all the proceeds from the disposal of property A into a superannuation fund.

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 118-185

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 114-5

Income Tax Assessment Act 1997 Section 114-10

Reasons for decision

The most common CGT event is a CGT event A1, which occurs when you dispose of a 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 will occur when you and your partner dispose of property A.

Main residence exemption

Generally, you can disregard a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence.

To get the full main exemption from CGT:

    · 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.

You cannot claim the full main residence exemption because you used property A to earn assessable income.

However, you are eligible for a partial main residence exemption as the dwelling attached to the shop has been you and your spouse's main residence.

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.

The choice needs to be made only for the income year that the CGT event happens to the dwelling.

If you make this choice, you cannot treat any other dwelling as your main residence for that period. The only exception to this is where you are changing main residences both dwellings are treated as your main residence for up six months.

If you use the dwelling to produce income you can choose to treat it as your main residence for up to six years after you stop living in it. If you are absent more than once during the period you own the dwelling, the six year maximum period that you can treat it as your main residence while you use it to produce income applies separately to each period of absence.

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

total capital gain made number of days in your ownership period when

from the CGT event X the dwelling was not your main residence

total number of days in your ownership period

In your case, you are entitled to a partial main residence exemption on your interest in property A (dwelling), as it was rented out for more than six years.

Business attached to main residence

If you set aside and use part of a property exclusively as a place of business, you cannot get a CGT exemption for that part of the property.

When a CGT event happens to the property, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable according to the extent to which you have been able to deduct the interest on money borrowed to acquire the property.

In most cases, when the property has been used to produce assessable income during your ownership period you use the proportion of the floor area of the property and the period you used the property to produce income to calculate your taxable portion.

The formula used is as follows:

percentage of percentage of

floor area not period of ownership

capital gain x used as main X that that part of the = taxable portion

residence home was not used

as main residence

In your case, property A consisted of a shop and your dwelling. You are not entitled to any exemption on your interest on the area the shop occupied as this has been rented out as a place of business for your entire ownership period. You will need to calculate the taxable portion based on the above formula.

You will need to add the result of the two calculations to determine your total capital gain made on the disposal of your interest in property A. Your portion of any capital gain made will be 50% of the total capital gain.

As your acquired your interest in property A before 21 September 1999 you can use either the indexation or discount method to calculate your capital gain. For information on these methods please see the enclosed information sheet, or information is also available on our website.

Note: As the shop has only been used to derive rental income it is not a small business asset and as such the small business retirement exemption cannot be used to disregard the capital gain made.