Edited version of private ruling

Authorisation Number: 1011751699307

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Ruling

Subject: Principle place of residence exemption

Question

Your spouse to be has a separate main residence. Can you also have a separate main residence for capital gains tax purposes after you are married?

Answer

Yes, but only a partial exemption will be allowed.

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You purchased a property and established a business shortly afterwards. You live onsite with your children.

Your spouse to be has recently moved into a home which is some distance away.

You reside together at both places depending on the tasks that are required to be performed.

At some stage your property will be sold dependent upon the property market. The property and the business will be sold together.

You are planning to marry and want to know if you can have a separate main residence to your spouse to be.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Subdivision 115-A,

Income Tax Assessment Act 1997 Section 118-110,

Income Tax Assessment Act 1997 Section 118-145,

Income Tax Assessment Act 1997 Subsection 118-170(3),

Income Tax Assessment Act 1997 Subsection 118-170(4),

Income Tax Assessment Act 1997 Section 118-192,

Income Tax Assessment Act 1997 Paragraph 118-190(1)(b) and

Income Tax Assessment Act 1997 Subsection 995-1(1).

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 www.ato.gov.au 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

All legislative references contained herein refer to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

You will only be entitled to a partial main residence exemption upon the sale of your property.

Detailed reasoning

Section 104-10 states that capital gains tax (CGT) event A1 occurs when a taxpayer disposes of a CGT asset. A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity, whether because of some event or by operation of the law.

You make a capital gain if the capital proceeds from the disposal of a CGT asset are more than the cost base of the asset. You make a capital loss if the capital proceeds are less than the reduced cost base of the asset.

Main residence exemption

As a general rule, an individual taxpayer can disregard any capital gain or loss realised on the disposal of their main residence under section 118-110. The conditions which must be satisfied for the exemption are:

· the taxpayer is an individual

· the dwelling was the main residence of the taxpayer throughout the ownership period

· the interest did not pass to the taxpayer as a beneficiary or the trustee of the estate of a deceased person

To obtain the full exemption from capital gains tax:

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

· the dwelling must not have been used to produce assessable income

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

Dwelling first used to produce income

If you start using your main residence to produce income for the first time after 20 August 1996 a special rule applies.

Section 118-192 applies an automatic rule when the following circumstances apply:

· the individual will only get a partial main residence exemption because the dwelling was used for producing income during the period they owned it

· the property commenced producing assessable income after 20 August 1996

· the individual would have had a full main residence exemption if they had sold the dwelling just before they began using it to produce assessable income.

The effect of the rule is that the individual is taken as having acquired the property at the time it first became income producing, for its market value at that time.

Use of dwelling for producing assessable income

Paragraph 118-190(1)(b) explains that you only get a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if the dwelling was used for the purpose of producing assessable income during all or a part of that period.

The proportion of the capital gain that is taxable is an amount that is reasonable given the proportion of the house that is income producing. In most cases this is the floor area of the home that is set aside to produce income and the period you used the home to produce income.

Spouse having different main residence

'Spouse' is defined in subsection 995-1(1) to include a person who, although not legally married to a person, lives with the person on a genuine domestic basis as the person's husband or wife.

Where spouses have separate main residences, they must nominate which dwelling is their main residence during the period they have separate main residences.

You can nominate one dwelling as the main residence for both of you or each nominates a separate dwelling. The nomination rule applies to each home the spouses own whether or not each spouse has an interest in the property. If you make the choice to nominate separate dwellings as your main residences and your ownership interest in that dwelling is greater than 50% you will only be entitled to a maximum 50% main residence exemption for the period that you are maintaining separate main residences.

Making a choice

A main residence choice must be made:

· by the day you lodge your income tax return for the income year in which the relevant CGT event happened

· within a further time allowed by the Commissioner.

Applying the law to your circumstances

Your spouse to be has more than 100% ownership interest in their property.

You have a 100% ownership interest in your property. Your property is used to produce assessable income.

For CGT purposes, you will be taken to have acquired the property for its market value at the time it first became income producing.

You will need to determine at what point you and your partner became "spouses". This may be prior to becoming married as you have been living together, see the definition above.

From the period that you had a spouse, you will only be entitled to a 50% partial main residence exemption on your property if you and your spouse choose different homes as your main residence.

Because your property was used to produce assessable income, the exempt portion of your capital gain will be further reduced. You will need to reduce the exempt portion of the capital gain based on the proportion of the home used for income producing purposes.

Note: You can not treat any other dwelling as your main residence for the period that you choose a home as your main residence.

As you have owned the property for more than 12 months, you may be entitled to apply the discount capital gains provisions in Subdivision 115-A