Edited version of private ruling

Authorisation Number: 1011778156007

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Ruling

Subject: Capital gains tax

Questions and answers:

1. Does the full capital gains tax (CGT) main residence exemption apply to the sale of your home that was rented out during the initial period of your ownership?

No.

2. Are you entitled to apply a partial main residence exemption to the capital gain that results from the sale of your property?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You purchased a property in the financial year ended 30 June 19XX.

You rented the property out until 2005 and you then moved into the property.

You remained living in the property until it was sold in the financial year ended 30 June 2010.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 100-20

Income Tax Assessment Act 1997 Section 100-35

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-185

Reasons for decision

Capital gains tax (CGT)

CGT is the tax that a taxpayer pays on any capital gain included in their annual income tax return. It is not a separate tax, merely a component of their income tax. The taxpayer is taxed on their net capital gain at their marginal tax rate. Their net capital gain is calculated by subtracting any capital losses that they may have accrued from their capital gains made in that income year.  Any net capital gain is then included in their assessable income by section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997). 

A taxpayer makes a capital gain or capital loss if a CGT event happens (section 100-20 of the ITAA 1997). For most CGT events, their capital gain is the difference between their capital proceeds and the cost base of their CGT asset (section 100-35 of the ITAA 1997).

CGT events are the different types of transactions or events that may result in a capital gain or capital loss. If the taxpayer disposes of land or a home (CGT event A1), the CGT event happens when they enter into the contract for disposal (sub-section 100-20 (3) of the ITAA 1997). In certain circumstances, there may be an exemption or exception that can apply, which means that the gain or loss created by the CGT event is disregarded.

Main residence

Under section 118-110 of the ITAA 1997 if you are an individual not a company or trust 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.

You can only claim the full main residence exemption where all of the following are satisfied:

· there was a dwelling on the property when you sold it

· the dwelling was your main residence for the whole of your ownership period

· you did not choose to treat any other dwelling as your main residence under the capital gains tax provisions during any part of your ownership period

· the property is less than two hectares in size, and

· the property was not used to earn assessable income.

You cannot claim the full main residence exemption because it was not your main residence for the whole of the ownership period and it was used to earn assessable income during part of the ownership period.

However, you can claim a partial main residence exemption as the property was your main residence during at least some of your ownership period.

Partial exemption

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are only eligible for a partial exemption (subsection 118-185(1) of the ITAA 1997). The full exemption is proportionately reduced by reference to the period that the property was not your main residence.

You calculate the part of the capital gain that is taxable as follows:

Number of days in your ownership period

Total capital gain made when dwelling was NOT your main residence

from CGT event X Total number of days in your ownership period

Example calculation

Taxpayer X acquired a dwelling on 20 October 2005 which they let out to tenants until 21 October 2008, from which date they used the dwelling as their main residence. Taxpayer X eventually sold the dwelling on 8 September 2010 and made a capital gain of $40,000, calculated without regard to the exemption provisions. The capital gain is reduced pro rata by reference to the period Taxpayer X used the dwelling as their main residence. The reduced capital gain is:

In your case, you are eligible for a partial main residence exemption. You can calculate the capital gain that will have to be included in your assessable income using the above formula.

The number of days in your ownership period when the dwelling was not your main residence will be the period you rented the property out and will be the number of days between the date of purchase and the date in 2005 that you moved into the property. The total capital gain made from CGT event should be the capital gain for the entire ownership period, calculated without regard to the exemption provisions.

As you jointly own the property, you will both make a capital gain in the same proportions as your interest in the property.

Indexation Method and 50% Discount Method

As you owned the dwelling for more than 12 months; and the dwelling was acquired before 21 September 1999 and sold after this date, you are entitled to use either the discount method or the indexation method to calculate any capital gain you have made.