Edited version of private ruling

Authorisation Number: 1011670447201

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Ruling

Subject: Capital gains tax (CGT) and main residence

1. Are you entitled to fully disregard any capital gain or loss that results from the disposal of property A?

No.

2. Are you entitled to partially disregard any capital gain or loss that results from the disposal of property A?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts

You and your spouse purchased property A after 21 September 1999.

The land on which the property is situated on and adjacent to is less than two hectares.

At the time that you purchased property A you were tenants of the property and purchased the property from your landlord.

After a period you and your spouse moved overseas.

Prior to moving to the overseas country, you and your spouse had never used property A to earn assessable income.

Both you and your spouse received private rulings declaring that you would be non-residents of Australia for tax purposes while you were overseas.

While you resided overseas property A was rented out.

Some time later you and your spouse returned to Australia.

On return to Australia you and your spouse decided to continue to rent out property A and live in rental accommodation.

You and your spouse purchased another property (property B). You moved into the property B as soon as was practical.

You have elected property B to be your main residence from the time that it was purchased.

It is your intention to sell property A. You have owned Property A for more than 12 months.

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 116-30

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 115-5

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, CGT event A1, occurs when you dispose of a CGT asset to someone else, for example, if you sell a property. A capital gain or capital loss is calculated by subtracting the cost base of the dwelling from the capital proceeds received from its sale.

Fully Disregarding your Capital Gain or Loss and the six year absence rule

You can generally disregard any capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it when:

· the dwelling was your home for the whole period you owned it

· the dwelling was not used to produce assessable income, and

· any land on which the dwelling is situated is not more than two hectares.

Once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence during periods of absence. 

Section 118-145 of the ITAA 1997 provides, where the dwelling is rented, the maximum period that you may continue to treat the dwelling as your main residence is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence, however if this choice is made a taxpayer cannot treat any other dwelling as their main residence.

In your case, you purchased property A and moved in as soon as was practical. As the dwelling was used as your home, was situated on and adjacent to land which is two hectares or less and as you had never used property A to earn assessable income up until the time that you left to move overseas you are entitled to apply the main residence exemption for this period.

As a result of your move overseas you rented out property A. As the period from this date to the time that you purchased your property at property B was less than six years you are entitled to choose to apply the six year absence rule and continue to treat property A as your main residence.

When property B was purchased, you elected this property to be your main residence. As you are only entitled to elect one property to be your main residence, from the time that property B was purchased to the date that property A is sold, you will not be able to disregard any capital gain or loss made on property A for this period.

Partially Disregarding your Capital Gain or Loss

When you are not able to fully disregard a capital gain or loss, you may be eligible to partially disregard it.

To calculate your capital gain or capital loss when the property was only subject to a main residence exemption for some of the period of ownership, the following formula must be used:

Total capital gain or loss X Non-main residence days

  Total days in your ownership

Where:

· capital gain or capital loss is the capital gain or capital loss you would have made from the CGT event if the main residence exemption had not applied

· non-main residence days is the number of days in your ownership period when the property was not your main residence

· your total days in your ownership period is from the acquisition date to the disposal date of the dwelling.

As property A was your main residence for only part of the period that you owned it, you will be entitled to a partial main residence exemption. It will be calculated in accordance with the above formula.

Calculating your capital gain or loss

Your capital gain for most CGT events is the difference between your capital proceeds and the cost base of your CGT asset. If you own the asset with another person, you need to apportion the gain or loss in accordance with your share of ownership interest.

Cost base

Your cost base for a CGT asset is made up of five elements:

· money or property given for the asset

· incidental costs of acquiring the CGT asset or that relate to the CGT event

· costs of owing the asset. (This element is modified when calculating the reduced cost base)

· capital costs to increase or preserve the value of your asset or to install or move it

· capital costs of preserving or defending your ownership of or rights to your asset.

You need to work out the amount for each element, and then add them together to work out the cost base of your CGT asset.

Capital proceeds

Capital proceeds are what you receive as a result of a CGT event. For most CGT events, your capital proceeds are an amount of money or the value of any property you receive.

Valuation of property values are only applicable when you dispose of a CGT Asset not at arms length. An example of a non-arms length agreement is where a person transfers property to their spouse for no consideration. In this case the market value of the property would be substituted for the proceeds.

Discount capital gain

The discount method of calculating capital gain is covered in Division 115 of the ITAA 1997. Specifically section 115-5 of the ITAA 1997 requires that:

· you are an individual

· a CGT event happens to an asset you own

· the CGT event happened after 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose the indexation method.

If the land was acquired prior to 21 September 1999 you can use either the indexation or discount method to calculate your capital gain.

Once you have subtracted your cost base from the proceeds received from the disposal of property A, you must apportion (in the case of a partial main residence exemption) the capital gain or capital loss over your total ownership period to determine the amount of capital gain or loss that can be disregarded.

In your case, your share of the capital gain or loss (as you and your spouse own Property A together) will be calculated by subtracting the cost base of Property A from the capital proceeds you receive as a result of its disposal, and multiplying it by the percentage of your ownership interest. As you have owned the property for more than 12 months and you are an individual who is disposing of an asset purchased after 21 September 1999 you are entitled to apply a 50% discount in calculating your net capital gains. Further, unless you are intending to dispose of property A in a non-arms length transaction, valuations are not applicable in your situation.