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Subject: Capital gains tax - Main residence - capital loss

Question:

Is the first element of the cost base of the property its market value on the date that you first used it to produce income?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2001

Relevant facts

You purchased a dwelling (dwelling 'A') after 20 September 1985 and resided in the dwelling for a number of years.

After a period of time you vacated dwelling 'A' and moved interstate.

You listed dwelling 'A' for sale with an agent and obtained an appraisal of the dwelling.

Dwelling 'A' was left vacant for a period of time whilst dwelling 'A' was listed for sale.

You decided after a period of time to list dwelling 'A' for rent and tenant's moved into the dwelling.

Around this time you purchased another dwelling (dwelling 'B') and will treat this dwelling as your main residence.

Dwelling 'A' continued to be rented until you decided to list the dwelling for sale.

Dwelling 'A' was listed for sale with a reduced sale price and you subsequently sold dwelling 'A' for a reduced price.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-192.

Income Tax Assessment Act 1997 Paragraph 118-192(1)(a).

Income Tax Assessment Act 1997 Paragraph 118-192(1)(aa).

Income Tax Assessment Act 1997 Paragraph 118-192(1)(b)

Income Tax Assessment Act 1997 Subsection 118-192(2)

Reasons for Decision

General

A capital gain or a capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Under section 104-10 of the ITAA 1997 the disposal of a CGT asset is a CGT event. You dispose of an asset when a change of ownership occurs from you to another entity.

Any capital gain or capital loss made from this CGT event will be disregarded if you are entitled to the main residence exemption.

Section 118-110 of the ITAA 1997 generally provides that any capital gain or capital loss you make from a CGT event that occurs in relation to your property is disregarded if the property was your main residence throughout the entire period that you owned it.

Special rule for home first used to produce income

If a main residence is first used to produce income after 20 August 1996, there is a special rule in section 118-192  of the ITAA 1997 that affects the way in which a capital gain or loss is calculated when the residence is sold.

Under the rule 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:

· only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during your ownership period: paragraph 118-192(1)(a)

· the income producing use started after 7.30 pm (by legal time in the ACT) on 20 August 1996: paragraph 118-192(1)(aa), and

· you would have been entitled to a full main residence exemption if you had entered into a contract to dispose of the dwelling just before the first time you used it for the income producing purpose: paragraph 118-192(1)(b).

In order to ensure that the rule applies to you, you must first work out whether your income producing use of the dwelling would have resulted in you obtaining only a partial main residence exemption. You do this by applying the CGT main residence rules (other than the rule in section 118-192 of the ITAA 1997).

You tenanted the dwelling for a period of time until you disposed of the dwelling. You would therefore be entitled to only a partial main residence exemption on any capital loss made on the sale of the dwelling. The first condition is satisfied.

You started using the dwelling to produce income after 20 August 1996 and would have been entitled to a full main residence exemption if you had entered into a contract to dispose of the dwelling just before it was first used for income producing purposes. The second and third conditions are also satisfied.

Accordingly, the rule in section 118-192(2) of the ITAA 1997 applies and you are therefore taken to have acquired the dwelling for its market value when you first used it to produce assessable income.

Legislation

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-192.

Income Tax Assessment Act 1997 Paragraph 118-192(1)(a).

Income Tax Assessment Act 1997 Paragraph 118-192(1)(aa).

Income Tax Assessment Act 1997 Paragraph 118-192(1)(b)

Income Tax Assessment Act 1997 Subsection 118-192(2)