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Ruling

Subject: Capital gains tax - Main residence exemption

Question 1

Will you be subject to capital gains tax (CGT) for removing your name from the title of your original dwelling?

Answer

Yes.

This ruling applies for the following periods:

Year ending 2012

Year ending 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased your original dwelling with your parent and sibling as joint proprietors after September 20 1985.

You lived with your parent and sibling at the original dwelling until you purchased and moved into your new dwelling which then became your principle place of residence.

You treated your new dwelling as your main residence from the time you purchased it.

The original dwelling is still your parent's principle place of residence and no income or rent has ever been sought from you.

You and your sibling are now seeking to remove your names from the title of the original dwelling to enable your parent to transfer their spouses name onto the title.

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 116-20,

Income Tax Assessment Act 1997 Section 116-30,

Income Tax Assessment Act 1997 Section 118-110 and

Income Tax Assessment Act 1997 Section 118-185.

Reasons for decision

Partial capital gains tax exemption

You make a capital gain or loss if and only if a CGT event happens to a CGT asset. Your original dwelling is a CGT asset.

CGT event A1 occurs when you dispose of an asset to someone else.

The time of this event is:

(a)   when you enter into the contract for the disposal: or

(b)   if there is no contract when the change of ownership occurs.

The removal of your name from the title of the original dwelling to enable your parent to transfer their spouses name onto the title will result in CGT event A1.

You make a capital gain if your capital proceeds are greater than your cost base for example, if you receive more for an asset than you paid for it. You make a capital loss if your capital proceeds are less than your reduced cost base.

Capital proceeds is the term used to describe the amount of money that you receive as a result of a CGT event happening. Therefore, the amount of money that you will receive as a result of the disposal of your original dwelling is the capital proceeds.

In most cases, any calculation of capital gain or loss is based on the actual capital proceeds received. However, in instances where the parties are not dealing at arms length and the capital proceeds are greater or less than the true market value of the asset or where you do not receive any capital proceeds, the market value substitution rule will apply. The effect of the market value substitution rule is to treat you as having disposed of the asset for its true market value.

In your case, if you do not dealt at arms length and the capital proceeds are greater or less than the true market value then you will be treated as having disposed of the original dwelling for its true market value.

In certain circumstances, a capital gain or loss made when a CGT event happens can be disregarded. A capital gain or loss from a dwelling is fully disregarded for CGT purposes if you are an individual and the dwelling was your main residence for your whole ownership period.

If a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that happens in relation to the dwelling. The capital gain or loss is calculated using the following formula:

Capital gain or capital loss amount multiplied by non-main residence days divided by total number of days in your ownership period.

You will be entitled to a partial main residence exemption. The non main residence days of your original interest in the dwelling is the number of days in the period from when you purchased your new dwelling until the date when you removed your name from the title of your old dwelling. The total number of days in your ownership period will be the number of days from 1 July 1993 until you remove your name from the title of the original dwelling.