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Ruling

Subject: Capital gains tax - maintaining two main residences

Questions and answers:

Are you entitled to a deduction or tax offset that relates to the costs associated with maintaining your dwellings?

No.

Are you entitled to fully disregard any capital gain or capital loss on your share of the sale of the unit?

No.

Are you entitled to partially disregard any capital gain or capital loss on your share of the sale of the unit?

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You and your spouse are no longer living together and have taken out a mortgage to jointly purchase a unit for your spouse to live in.

Although you have physically separated, you are not divorced or planning to be and you still have an amicable relationship and care for your children on a shared basis.

The house you live in and the unit your spouse now lives in are jointly owned by you both.

Your spouse's unit is located on a small residential block of land.

You have never lived in your spouse's unit.

You choose to keep your current main residence for the entire period.

You lived together in the home you are occupying for a number of years.

Your spouse has lived in her unit for less than 12 months.

You are considering selling the unit within the current financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 100-50
Income Tax Assessment Act 1997 Section 103-25
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 115-10
Income Tax Assessment Act 1997 Section 115-15
Income Tax Assessment Act 1997 Section 115-20
Income Tax Assessment Act 1997 Section 115-25
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-170

Reasons for decision

Deductible expenses

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to claim a deduction for all losses and expenses as long as when you incurred them you were gaining or producing your assessable income and they are directly associated with earning your income. Alternatively, where the expenses have the character of a capital, private or domestic nature, they are not deductible.

For example, if you have a rental property you will be earning assessable income from the rent that your tenants are paying and you will be entitled to claim deductions for the expenses associated with maintaining that rental property.

However, as stated above, private and domestic expenses are not deductible; hence you are not able to claim deductions for expenses in relation to your main residence or any property that is not earning assessable income.

Tax offsets

Tax offsets (previously referred to as rebates) directly reduce the amount of tax you must pay. There are a variety of tax offsets available however, there are none available that relate to the maintenance of two separate homes.

Therefore, no tax offsets are available to you to help with the costs of maintaining two dwellings.

Capital gains tax

Capital gains tax (CGT) is income tax paid on any net capital gain made as the result of a CGT event taking place. CGT events are the different types of transactions that may result in a capital gain or capital loss. As a general rule whenever a CGT asset, such as land and buildings (property) are sold (or otherwise disposed of) as part of a CGT event, the vendor will be subject to the CGT provisions and will need to determine whether a capital gain or capital loss has resulted.

This type of CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a post-CGT asset from one entity to another.

When considering the disposal of a CGT asset the most important element in the application of the CGT provisions is ownership. In the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title.

You are a joint owner of the unit in which your spouse is living and you therefore will be unable to disregard any capital gain or loss made when the dwelling is sold in accordance with your ownership interest.

Main Residence Exemption

In most cases you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence if:

· the dwelling was your home for the whole period you owned it;

· the property was not used to produce assessable income; and

· any land on which the dwelling is situated is not more than two hectares.

Where you are not fully exempt from CGT, you may be partially exempt if:

· the dwelling was your main residence during only part of the period you owned it;

· you used the dwelling to produce assessable income; or

· the land on which the dwelling is situated is more than two hectares.

Spouses living separately

If you and your spouse each have a separate dwelling as your main residence during a particular period, you may choose one of the dwellings as the main residence of both of you for the period.

Alternatively, you and your spouse may each nominate a different dwelling as your main residence for the period. However, if you make separate nominations, each will only be entitled to a maximum 50% main residence exemption for the period.

The effect and intent of this rule is that a couple will not obtain the benefit of the main residence exemption for two dwellings for the period that they maintain separate homes. They either get the full exemption for one dwelling or half the exemption for each of the two dwellings for that period.

However, these choice rules do not apply where you and your spouse are living permanently and separately apart as 'spouse' is defined in subsection 995-1(1) of the ITAA 1997 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. This means that you can claim the main residence exemption on your ownership interest in the dwelling that you choose as your main residence.

In your case, as you jointly own the unit, you have an ownership interest in it. You have never lived in the unit and it has therefore never been your main residence. Accordingly, when the unit is sold you will be unable to disregard your share of any capital gain or loss that is made in accordance with your ownership interest under a main residence exemption.

Summary and conclusion

You and your spouse acquired your marital property together and lived together there for a number of years. After it became apparent that you could no longer live together, you and your spouse acquired the unit. Your spouse moved into this unit and you remained in the marital property. You are not divorced, nor are you planning to be.

When you sell the unit, as you have joint ownership, you will be unable to disregard your share of any capital gain or loss that is made in accordance with your ownership interest. As you have never lived in the unit, you will not be eligible for a main residence exemption.