Edited version of private ruling

Authorisation Number: 1011641402245

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Ruling

Subject: Capital gains tax

Is the full amount of the capital gain or loss made on the disposal of your overseas dwelling disregarded?

No.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your parents gifted you a dwelling in overseas sometime after 20 September 1985 (Overseas dwelling).

You occupied the dwelling as your main residence several years after it was gifted.

You later moved to Australia and became an Australian resident.

You made the choice to continue to treat the overseas dwelling as your main residence.

Your parents have regularly used the dwelling as a holiday flat.

The overseas dwelling has never been rented out.

You purchased a property in Australia (Australian dwelling) and occupied it as your main residence.

You plan to sell the overseas dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-10(2)

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Section 10-5

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 855-45.

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.

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an Australian resident taxpayer's assessable income includes the ordinary income derived from all sources whether in or out of Australia, during the income year.

Subsection 6-10(2) of the ITAA 1997 provides that income amounts that are not ordinary income and are included in your assessable income are called statutory income. Capital Gains are referred to as statutory income. Subsection 6-10(4) of the ITAA 1997 provides that if you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

When you become an Australia resident (other than a temporary resident) you are taken to have acquired certain assets at the time you became a resident for their market value at that time.

In your case, you are taken to have acquired the overseas dwelling when you became an Australian resident for its market value at that time.

Main residence exemption

Although you will be deemed to have acquired the property at the time that you became a resident of Australia for taxation purposes, in considering the main residence provision the entire ownership of the property is taken into account.

Generally, you can disregard a capital gain or capital loss you make from a capital gains tax (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.

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

If a dwelling that was your main residence ceases to be your main residence, there are provisions that allow you to extend the main residence exemption beyond the period in which you are occupying the dwelling as your main residence. This means that you can choose to continue to treat it as your main residence after you move out. If you do not use the dwelling to produce assessable income, for example, rent it out, you can treat it as your main residence indefinitely. You can only make this choice for a dwelling that you have first occupied as your main residence.

If you make this choice, you cannot treat any other dwelling as your main residence for that period, except for a limited time if you are changing main residences. If you acquire a new home before you dispose of your old home, both dwellings are treated as your main residence for up to six months if:

· the old dwelling was your main residence for a continuous period of at least three months in the 12 months before you disposed of it

· you did not use the old dwelling to produce assessable income in any part of those twelve months, and

· the new dwelling becomes your main residence.

In your case, you acquired the overseas dwelling, and some years later occupied it as your main residence. You made the choice to continue to treat the dwelling as your main residence after you moved out, until you occupied the Australian dwelling as your main residence. As you did not use the overseas dwelling to produce assessable income, the overseas dwelling is considered to have been your main residence from the time you first occupied it as your main residence until you occupied the Australian dwelling as your main residence.

Calculating a partial exemption

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. For more information about the five elements of the cost base, please refer to the Guide to capital gains tax 2009 (NAT 4151) located on the Australian Tax Office's website.

Non main residence days is the number of days in your ownership period of the overseas dwelling that it was not your main residence. Settlement dates are used to calculate the period for which the main residence exemption applies. This will include the following two periods:

· from the time the overseas dwelling was gifted to you until you occupied it as your main residence, and

· from the time you occupied the Australian dwelling as your main residence, until settlement for the sale of the overseas dwelling occurs.

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 the overseas dwelling was gifted to you, until the date of settlement for the sale of the overseas dwelling.