Edited version of private ruling

Authorisation Number: 1011887920251

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Ruling

Subject: Capital gains tax

Question :

Are you entitled to a main residence exemption on the disposal of property A, for a period starting from the date you first moved in, to the date of sale of the property?

Answer:

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

Your property A was rented out for approximately 18 months after it was purchased.

Thereafter you moved into the property and used it as your main residence for approximately 18 months.

During this time you subdivided the property and built a second dwelling, property B, on the adjacent land.

You then moved into another rental property, property C, that you have owned for 12 years. You lived there for a period of three years while property A was rented out.

You now wish to move back into property A and re-establish it as your main residence. You intend to sell this property in the 2011-12 financial year. You would elect this property as your main residence for the second period it was rented.

You are aware that as a consequence of this choice, your property C will be subject to Capital Gains Tax for the entire period of ownership and the value of the land used to create property B will be excluded from the cost base of property A.

Reasons for decision

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

CGT event A1 will happen when you dispose of the CGT asset to someone else (section 104-10 of the ITAA 1997). Property is a CGT asset.

Main residence exemption 

Generally, if a taxpayer is an individual (not a company or trust), they can disregard any capital gain or loss from a capital gains tax (CGT) event that happens to the taxpayers ownership interest in a dwelling that is their main residence.

To get a full exemption from CGT: 

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

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

· any land on which the dwelling is situated must be 2 hectares or less.

Moving into a dwelling as soon as is practical

Section 118-135 of the ITAA 1997 extends the main residence exemption to take account of the time needed to move into a dwelling. It includes the period from when you acquired the main residence to when it was first practicable to move into the dwelling after you acquired it.

However, the Explanatory Memorandum to the Bill which became the Tax Law Improvement Act (No.1) 1998 states that section 118-135 is not extended to the situation where the individual is unable to move into the dwelling because it is being rented out at the time of purchase.

Six year absence rule

Section 118-145 of the ITAA 1997 provides that you can continue to treat a dwelling as your main residence during periods of absence. 

· If the dwelling is not used to produce income it can be treated as your main residence indefinitely.

· If the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is six years.

You are entitled to another maximum period of six years each time the dwelling again becomes, and then ceases to be, your main residence.  The Commissioner does not have any discretion to extend the six year period.

You moved into property A after renting it out for an initial period of 18 months. Therefore you are unable to use main residence exemption for this period as per section 118-135 of the ITAA 1997.

However you can elect to choose this property as your main residence from the date you first moved in, to the date it is sold, as long as the period it was used to produce income does not exceed six years as per section 118-145 of the ITAA 1997.

To calculate your capital gains on the sale of the property please use the following formula:

[(Proceeds from sale - cost base) X Number of days initially rented] ÷ Number of days of ownership