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Ruling

Subject: CGT - cost base

Question and answer:

Are you entitled to use the market value of property A at the time it was first used to produce income as the first element of the cost base of property?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts

After 20 August 1995, you purchased a unit (property A) and occupied it as your main residence from the date of purchase.

You are listed as the sole owner on the title deed of property A.

After a period you received a valuation of property A.

You and your partner then purchased a residence (property B) in joint names.

After the purchase and your partner moved into property B and elected it to be your main residence.

After a period property A began to be used to earn assessable income.

After a number of years you disposed of property A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 118-140.

Income Tax Assessment Act 1997 Section 118-192.

Reasons for decision

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that a capital gains tax (CGT) event A1 occurs if you dispose of a CGT asset (such as property). A disposal takes place when there is a change of ownership from one entity to another.

You purchased property A on 30 May 2005 and disposed of the property in October 2010. The disposal of property A triggered a CGT event A1.

Calculating a capital gain or loss

For most CGT events, the capital gain is the difference between the capital proceeds and the cost base of the CGT asset. That is, if an individual sells an asset for more than they paid for it. They will make a capital loss if their reduced cost base of the CGT asset is greater than their capital proceeds.

Section 110-25 of the ITAA 1997, advises that the cost base of a CGT asset consists of five elements. The first element of the cost base of a CGT asset are the acquisition costs, which is the total of the money paid in respect of the acquisition of the asset.

The first element of your cost base of property A will be the money paid for its acquisition on, subject to other provisions.

Rule for home first used to produce income rule 

Under section 118-192 of the ITAA 1997, if you start using your main residence to produce income, there is a special rule that affects the way you calculate your capital gain or capital loss. In working out the amount of capital gain or capital loss, the period before the dwelling is first use to produce income is not taken into account.

You are taken to have acquired the dwelling at the time you first started using it for income producing purposes for its market value at that time if all of the following apply:

· you first used the dwelling to produce income after 20 August 1996;

· when a CGT event happens in relation to the dwelling, you would obtain only a partial exemption because the dwelling was used to produce assessable income during the period you owned it; and

· you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

Changing Main Residences

Under Subsection 118-140 (1) of the ITAA 1997, if you acquire an ownership interest in another property and intend to use it as your main residence, you are able to treat your original property and your newly acquired property as your main residences for a maximum period of six months.

Subsection 118-140 (2) of the ITAA 1997 states that this exemption only applies if:

· your original main residence was your main residence for a minimum of 3 months in the 12 months prior to the disposal of it, and

· you did not use it to produce assessable income in any part of those 12 months when it was not your main residence.

Conclusion

In applying the conditions listed under section 118-192 of the ITAA 1997, property A was first used to produce income after 20 August 1996 and you would have only been entitled to a partial exemption as property A was used to produce assessable income during your ownership period. Property A satisfies the conditions outlined under section 118-140 of the ITAA 1997, therefore property A would have been exempt from CGT directly before it was made available for rent if the CGT event happened then. As you have met the conditions outlined under section 118-192 of the ITAA 1997, you are entitled to apply this provision to the cost base of property A.

Accordingly, you are entitled to use the market value of property A at the time it was first used to produce assessable income on as the first element of the cost base, under section 118-192 of the ITAA 1997.