Edited version of private ruling

Authorisation Number: 1011671875249

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Ruling

Subject: Capital gains tax - Main residence and absence choice

Question 1: Is the capital gain or capital loss made on the disposal of property A?

Answer:  Yes.

Question 2: Will you pay capital gains tax (CGT) on the disposal of property B?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You and your spouse are temporary residents of Australia and hold Visas which are due to expire in approximately nine years.

In 2003, you and your spouse jointly purchased vacant land (property A).

The vacant land does not exceed two hectares.

You and your spouse constructed a dwelling on the vacant land. The dwelling was completed the following year.

You and your spouse moved in and established property A as your main residence as soon as practicable after construction of the dwelling was completed.

More than two years ago you and your spouse jointly purchased a dwelling (property B).

Property B is on the property market.

Approximately six months later you and your spouse moved out of property A and moved into property B.

Property A has been available to rent shortly after you vacated it.

Property A was valued at $X to $X.

Property A is currently untenanted but is still on the rental market.

You and your spouse are planning an extended absence for Australia for a period of up to two years.

You and your spouse wish to continue to treat property A as your main residence.

Property A is currently on the property market with the current asking price of $X.

For the purposes of this ruling both properties will be disposed by the end of the 2012 year of income.

You will make a capital loss on the disposal of property B,

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-15.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-150.

Reasons for decision

The most common event is CGT event A1.  CGT event A1 happens when you dispose of an asset to someone else, for example the disposal of Westgarth Place.  

The disposal of your interest in property A constitutes a CGT event A1.

Main residence exemption

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence.

To get the full exemption from CGT:

· the dwelling must have been your home for your of whole ownership period;

· you must not have used the dwelling to produce assessable income; and

· any land on which the dwelling is situated must be two hectares of less.

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 commenced to rent it out.  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.

Capital loss

Where a capital loss has been realised as a result of a CGT event, such as a disposal, occurring to a CGT asset, the capital loss must be applied to any capital gain that is realised in that or future income tax years .

If you have unapplied net capital losses from earlier years that can be applied they must be applied against capital gains in the order you make them. You can then apply these capital losses against your capital gains in the manner that gives you the best result.

You cannot choose to defer your unapplied capital losses to a later income year that can be applied to a capital gain made in the relevant year of income.

If a capital gain is not realised, or the capital loss is greater than the capital gain, any unapplied net capital losses you have can continue to carry over these amounts and use them to reduce your future capital gains. There is no time limit on how long you can carry over your net capital losses.

How this applies to your circumstances

Property A

You will be entitled to the full main residence exemption as property A will have been your main residence for your entire ownership period of because you and your spouse have elected to continue to treat it as your main residence and it will not have rented out for a period of more than six years. 

Therefore, you disregard any capital gain or capital loss made upon disposal of property A.

Property B

You will not be entitled to the main residence exemption upon the disposal of property B as you and your spouse have elected to continue to treat property A as your main residence.

You only pay income tax if a net capital gain is included as assessable income in your income tax return. The capital loss you will make on the disposal of property B can be applied to any capital gain/s you make.