Edited version of private ruling

Authorisation Number: 1011727943072

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Ruling

Subject: Partial main residence - compulsory acquisition

Question 1:

Is the Commissioner satisfied that you 'moved in' to the property and re-established the property as your main residence?

Answer:

No.

Question 2:

If a property is compulsorily acquired, does the full amount of the proceeds need to be re-invested to obtain the full roll-over of the capital gain?

Answer:

Yes.

Question 3:

If the property was sold for $X and you purchased a replacement property for $Y, but borrowed 75% of the of the purchase price, have you actually re-invested $Y?

Answer:

Yes.

Question 4:

Are you liable to pay capital gains tax (CGT) if you sell the replacement property in the future?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You purchased a property, property A, a number of years ago. The land area was less than two hectares and you moved into property A as soon as practicable after purchase and lived there for a year. At this time you decided to rent property A and the property was first used to produce income on date X.

You then moved overseas to live and work.

Less than six years after date X the tenants vacated the property. You arrived in Australia shortly after this and you state that you moved back into property A on this date.

You advised that a change of plan took place and you departed from Australia less than three weeks later and returned back overseas. Tax office records indicate that you had the same overseas address for the 2006-07 financial year and the 2007-08 financial year.

You did not state the date that you moved out of property A. You state that you had the phone, electricity and gas connected. You also stated that you notified the ATO of a change of address however, ATO records do not support this.

You did not obtain contents insurance as you were just starting to gather some furniture together. You state that you did not contact the electoral roll as you had been overseas for a number of years at that time. You advised that your employer overseas held open your job as this is the norm in your field of work.

The property was re-occupied by tenants. The property remained tenanted until it was compulsorily acquired in the 2009-10 income year. The period from the date that the property was first used to produce income until the property was compulsorily acquired as more than six years.

Anticipating the sale of property A, you purchased an investment property, property B, in a nearby area for less than you received. You provided an amount of the purchase price with cash and borrowed the remainder. Therefore you have an amount of cash that remains after only paying the deposit.

Relevant legislative provisions

Income Tax Assessment Act 1997 section102-20

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 section118-192

Income Tax Assessment Act 1997 paragraph 118-192(1)(a)

Income Tax Assessment Act 1997 paragraph 118-192(1)(aa)

Income Tax Assessment Act 1997 paragraph 118-192(1)(b)

Income Tax Assessment Act 1997 subsection118-192(2)

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 subsection 124-75(2)

Income Tax Assessment Act 1997 subsection 124-75(3)

Income Tax Assessment Act 1997 subsection 124-85(2)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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

The capital gains tax (CGT) provisions are contained in Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997). CGT is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a 'CGT event' happens (section 102-20 of the ITAA 1997). The most common CGT event A1 happens when you dispose of the asset to another party (for example disposal of a dwelling) (section 104-10 of the ITAA 1997).

A capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if you are an individual and the dwelling was your main residence throughout your ownership period (section 118-110 of the ITAA 1997). Under certain circumstances, you can choose to have your main residence treated as your main residence even though you are no longer living there. If you make this choice no other dwelling can be treated as your main residence for this period.

Moving in

CGT Determination Number TD 51 discusses relevant factors to consider when determining if you have established a dwelling as your main residence.

Some relevant factors may include, but are not limited to:

· the length of time you have lived in the dwelling

· the place of residence of your family

· whether you have moved your personal belongings into the dwelling

· the address to which you have your mail delivered

· your address on the Electoral Roll

· the connection of services such as telephone, gas and electricity, and

· your intention in occupying the dwelling.

The relevance and weight to be given to each of these or other factors will depend upon the circumstances of each particular case.

A mere intention to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption.

Question 1

You arrived in Australia and departed within three weeks. You state that you moved into the dwelling on the date that you arrived and did not state on which date you moved out however your period of time living in the dwelling was less than three weeks.

You did not state if any family members moved into the dwelling with you. You state that you were gathering some furniture but you did not take out any contents insurance. You did not advise if you had mail directed to the property but you stated that as you had been absent from Australia for a number of years you did not notify the Electoral Office of your new address.

You state that you had the telephone, gas and electricity connected. You have not provided details of your intentions, whether you had employment in Australia and ceased your living arrangements overseas but you did state that your job overseas had been held open for you overseas as is the trend in your occupation. Our records show the same overseas address for you before and after your trip to Australia.

Considering all of the above factors, it is not considered that you have established the property as your main residence.

Six year absence rule

If you use the dwelling to produce income, the maximum length of time you can choose to have it treated as your main residence is six years after you cease living in it. You are entitled to another maximum period of six years each time the dwelling again becomes and then ceases to be your main residence (section 118-145 of the ITAA 1997).

Dwelling first used to produce income

Section 118-192 of the ITAA 1997 sets out a special rule which is applied in working out a capital gain or loss on a dwelling which has been a main residence and which has also been used for income producing purposes. That rule applies if:

· only a partial main residence exemption would be available under Subdivision 118-B of the ITAA 1997 because the dwelling was used for the purpose of producing assessable income during the taxpayer's ownership period (paragraph 118-192(1)(a) of the ITAA 1997)

· the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996 (paragraph 118-192(1)(aa) of the ITAA 1997), and

· the taxpayer would have been entitled to a full main residence exemption if they had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose (paragraph 118-192(1)(b) of the ITAA 1997).

If these conditions are satisfied, the taxpayer is taken to have acquired the dwelling at the time they first started using it for income producing purposes for its market value at that time (subsection 118-192(2) of the ITAA 1997). This has the effect that the first element of the dwelling's cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes (and that expenditure incurred by the taxpayer prior to that day is ignored).

Partial main residence exemption

Section 118-185 of the ITAA 1997 states that if a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that occurs in relation to the dwelling. The capital gain or loss is calculated using the following formula:

In your case, non-main residence will be the number of ownership days during which you are absent from the dwelling in excess of the six years allowed under section 118-145 of the ITAA 1997. Total days will be from the date you first used the property to produce assessable income until the compulsory acquisition.

Discount Method

You are able to use the discount method to reduce your capital gain if:

· you are an individual, a trust or a complying superannuation fund

· a CGT event happens to an asset you own

· the CGT event happened after 11:45am (by legal time in the ACT) on 21 September 1999

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

· you did not choose to use the indexation method.

The discount percentage for individuals to reduce their capital gain by is 50%.

Application to you

You will be able to take advantage of the 'home first used to produce income' rule. Therefore your capital gain will be calculated by subtracting the value of the property on the date the property was first used to produce income from the amount received as compensation. You will then apply the six year absence rule and multiply the gain by non-main residence days over ownership days (in this case from the date first used to produce income). You can then apply the discount method and reduce the gain by 50%. This would be the gain that would be included in your income tax return.

Loss, destruction or compulsory acquisition of an asset

In some situations where your CGT asset has been lost or destroyed or compulsorily acquired you may defer a capital gain.

The roll-over may be available if one of the following events happens (section 124-70 of the ITAA 1997):

· all or part of your CGT asset is lost or destroyed

· your CGT asset is compulsorily acquired by an Australian government agency

· your CGT asset is compulsorily acquired by an entity (other than by an Australian government agency or a foreign government agency) under a power of compulsory acquisition conferred by an Australian or foreign law.

In this case, you may be able to choose to defer your liability to pay tax on any capital gain arising on the disposal until a CGT event happens to the replacement asset.

Receiving money

If you receive money because a CGT event happens, you can choose a roll-over only if:

· you incur expenditure in acquiring another CGT asset that is used

o in your business or is installed ready for use in the business for a reasonable period of the original asset was a business asset, or

o otherwise, for a reasonable period for the same or a similar purpose as the original asset, or

· part of the original asset is lost or destroyed and you incur expenditure of a capital nature in repairing or restoring it (subsection 124-75(2) of the ITAA 1997)

You must incur at least some of the expenditure:

· no earlier than one year before the event happens, or

· within one year after the end of the income year in which the event happens (subsection 124-75(3) of the ITAA 1997).

There is no restriction on the number of CGT assets which may be treated as replacement asset for an original CGT asset in the replacement asset roll-over provisions in Subdivision 124-B provided that they each satisfy the relevant requirements of that Subdivision.

Section 124-85(2) of the ITAA 1997 provides roll-over relief where the asset was a post-CGT asset and a capital gain (the notional capital gain) would have arisen on the disposal of that asset. Also it spells out how the notional capital gain will be treated, as follows.

· If the compensation received is less than the cost of the replacement asset then such costs are reduced by the amount of the notional capital gain. The consequence is that any CGT liability is deferred until the ultimate disposal of the replaced asset.

· If the compensation received exceeds the cost of the replacement asset and the notional capital gain is greater than that excess, then a capital gain equal to that excess must be brought to account in the year of disposal. In addition the cost base of the replacement asset is deemed to be reduced by the balance of the "notional capital gain" not treated as an actual capital gain.

· If the compensation or insurance proceeds received exceed the cost of the replacement asset and the notional capital gain is equal to or less than that excess, then the amount of the notional capital gain is to be brought to account as an actual capital gain in the year of disposal.

Question 2

If you do not spend the full proceeds from the compulsory acquisition of your property, you will have to make a calculation as above. You are able to purchase another replacement asset as long as you incur some expenditure in acquiring the replacement asset within one year of the compulsory acquisition of the original property.

Question 3

The legislation does not provide that you need to pay for the replacement asset using the funds that you received. You are able to purchase the replacement asset with a combination of cash and/or borrowed funds.

Question 4

The legislation allows a taxpayer to defer a capital gain. Therefore, when the replacement asset is sold, the capital gain that has been rolled-over will need to be included in your return for the year that the replacement asset is disposed of (CGT event).