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Authorisation Number: 1012088394627

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Subject: capital gains tax - main residence - absence choice - disposal

Question: Is the capital gain made on the disposal of the dwelling disregarded?

Answer: No.

This ruling applies for the following period

Income year ended 30 June 2013

The scheme commenced on

1 July 2001

Relevant facts and circumstances

You purchased a dwelling after 20 September 1985 and resided there for a number of years until you moved interstate due to personal reasons.

The dwelling was rented out and you made the absence choice to continue to treat the dwelling as your main residence from the time it was rented out.

For the purposes of this private ruling, you will dispose of the dwelling during the 2012-13 income year and will make a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-192

Reasons for decision

Main residence exemption

A capital gain or capital loss will occur when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when a CGT asset is disposed of.

Generally, you disregard a capital gain made on the disposal of a dwelling that is your main residence if the dwelling was your home for the whole period you owned it, the dwelling was not used to produce assessable income, and any land on which the dwelling is situated is not more than 2 hectares.

These provisions are extended to cover those taxpayers who leave their main residence, but choose to continue to treat it as their main residence even if it is rented out, provided certain conditions are met.

If a dwelling ceases to be a taxpayer's main residence, and they use the dwelling to produce assessable income, they can choose to treat the dwelling as their main residence for up to six years after they ceased living in it. This is known as an absence choice.

This choice can be made each time a taxpayer moves out of their main residence and commences renting out the dwelling.

If you make this choice, you cannot treat any other dwelling as your main residence for that period.

Home 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 affects the way you calculate your capital gain or capital loss.

In this case, you are taken to have acquired your home at its market value at the time it is first used to produce income if all of the following apply:

§ you acquired your dwelling on or after 20 September 1985;

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

§ when a CGT event occurs, you would only obtain a part exemption because your dwelling was used to produce assessable income during the period you owned it; and

§ you would be entitled to a full exemption if the CGT event happened to your dwelling immediately before you first used it to produce income.

Partial main residence 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 will only be eligible for a partial exemption on the disposal of the dwelling.

In that situation, the capital gain is calculated using the following formula:

Capital gain X Non-main residence days_________

Total number of days in your ownership period

Conclusion

In your case, you purchased the dwelling and resided there for a number of years until you moved interstate. The dwelling was rented out and you made the absence choice in relation to the dwelling.

The absence choice period commenced when the dwelling was first rented out and could continue for up to six years while the dwelling was rented out. In this case, the absence period was from the date the dwelling was first rented out until six years after that date.

You will dispose of the dwelling during the 2012-13 income year. As the period of time you lived in the dwelling and the period covered by the absence choice will not encompass all of your ownership period, the capital gain made on the disposal of the dwelling is not disregarded.

You are entitled to a partial main residence exemption when you dispose of the dwelling in during the 2012-13 income year. As such, the first used to produce income rule will be applied first and then the partial exemption.

In your case, the following will be used when calculating the capital gain you have made on the disposal of your dwelling:

§ You are you are taken to have acquired your dwelling at its market value at the time it is first used to produce income. This will be the first element of the cost base of your dwelling when calculating the capital gain;

§ Your non-main residence days will be from the date the period covered by the absence choice ends in 2007, until the settlement on the disposal of the dwelling occurs during the 2012-13 income year; and

§ Your total number of days in your ownership period is from the settlement date when you acquired the dwelling until the settlement date when the dwelling is disposed of during the 2012-13 income year.

You will be able to apply a 50% discount to the capital gain made on the disposal of the dwelling if you did not use the indexation method when calculating the dwelling's cost base.

Note: While we acknowledge and appreciate your personal circumstances, you are not eligible for any exemptions under the CGT provisions that would enable you to fully disregard the capital gain made on the disposal of your dwelling.