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Ruling
Subject: Capital gains tax
Question and answer:
Are you entitled to use the market value of the property at the time that it ceased being a rental property as the proceeds that you received?
No.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on:
1 July 2011
Relevant facts
You jointly purchased a rental property post 20 September 1985.
The property was rented out for a period.
You ceased renting out the property due extensive termite damage.
At the time that the property ceased to be rental property you had the property valued.
You intend to demolish the existing dwelling in favour of a building a new dwelling.
Once construction of the new dwelling is complete you intend to occupy the dwelling as your main residence.
After occupying the new dwelling for a period you intend on disposing of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997, Section 102-20
Income Tax Assessment Act 1997, Subsection 104-10
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Subsection 110-25(5)
Income Tax Assessment Act 1997 Sections 112-30
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 116-25
Income Tax Assessment Act 1997 Section 118-185
Income Tax Assessment Act 1997 Section 118-192
Income Tax Assessment Act 1997, Subsection 126-5(1)
Income Tax Assessment Act 1997, Subsection 126-6(6)
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. Section 108-5 of the ITAA 1997 lists land and buildings as CGT assets.
Under section 104-10 of the ITAA 1997, a CGT event A1 occurs when you dispose of the CGT asset to someone else. You make a capital gain if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.
Generally, you can disregard any capital gain or loss you make when you dispose of your main residence if it was your main residence throughout your ownership period, under section 118-110 of the ITAA 1997.
In your case, you first used the property as a rental property for a period. You plan to demolish the existing dwelling in favour of building a new dwelling. Once the building of new dwelling is complete you then intend to occupy the dwelling as your main residence for a period before disposing of the property. As this property was not your main residence for the entire period of ownership you are only entitled to a partial main residence exemption when the property is disposed of under section 118-185 of the ITAA 1997.
At the time you stop renting the property there is no CGT event and therefore no capital gain or capital loss to calculate. There is no provision within the legislation that gives the Commissioner the discretion to allow you to use the market value at the time you first occupied the dwelling as the proceeds for the purposes of calculating your capital gain.
Note: There is a special rule under section 118-192 of the ITAA 1997 where you have occupied a dwelling as your main residence and then subsequently moved out and used your dwelling to produce income. Where this section applies you are taken to have acquired the dwelling at its market value at the time it is first used to produce income. However this rule cannot be applied in your situation as you first used the dwelling to produce assessable income before building a new dwelling and occupying it as your main residence.