Edited version of private ruling

Authorisation Number: 1011703537721

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Ruling

Subject: Capital Gains Tax

Question

Is Capital Gains Tax (CGT) payable by a company on the sale of a dwelling which throughout the ownership period was the principal residence of the company's two shareholders who would otherwise have been eligible for the main residence exemption in section 118-110 of the income Tax Assessment Act 1997 (ITAA 1997) if the property had been held in their names?

Answer

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010.

The scheme commenced on

I July 2009

Relevant facts

A company was incorporated for the purpose of buying for its shareholders a property for sole use as their residence. The couple were appointed directors and issued one ordinary share each with further shares subsequently issued.

A dwelling was then purchased. The couple were given the right to occupy the property. The property was eventually sold.

The property was throughout the period of ownership the sole and principle residence of the couple. They had occupied the property exclusively since its purchase. They had no other residence whilst the company owned the property.

The company has never traded nor received any income. The property was never rented or leased. Any company expenses such as annual ASIC fees have been paid by the shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-15,

Income Tax Assessment Act 1997 118-110

Income Tax Assessment Act 1997 960-100 and

Income Tax Assessment Act 1997 995-1.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

One of the conditions which must be met in order to obtain the main residence exemption is that the taxpayer is an individual. Subsection 995-1(1) defines an individual to mean a natural person.

The dwelling in this case was acquired by a company. Therefore, the requirements of paragraph 118-110(1)(a) cannot be satisfied.

Detailed reasoning

Section 118-110 provides that a capital gain or capital loss made by a taxpayer from a CGT event happening to a CGT asset that is a dwelling or to an ownership interest in a dwelling is disregarded if the dwelling was their main residence throughout the ownership period and certain other conditions are met. One of the conditions, as set out in paragraph 118-110(1)(a), is that the taxpayer is an individual. Subsection 995-1(1) defines an individual to mean a natural person.

The dwelling in this case was acquired by a company. As defined in section 995-1, a company is not an individual. Therefore, the requirements of paragraph 118-110(1)(a) cannot be satisfied.

The ITAA 1997 recognises that a legal person can have a number of different capacities in which that person acts. In each of those capacities, the person is taken to be a different entity (subsection 960-100(3)).

However, if a provision of the ITAA 1997 refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity (subsection 960-100(4)). Therefore, the reference in paragraph 118-110(1)(a) to an individual is a reference to an individual acting in their personal capacity not in another capacity such as a shareholder or director.

It follows that the main residence exemption in Subdivision 118-B of the ITAA 1997 does not apply in respect of a dwelling owned by a company even though the director-shareholders of the company lived in the property throughout the ownership period. Accordingly, any capital gain or capital loss made from the disposal of the dwelling by the company cannot be disregarded.